Wednesday, July 15, 2015

Cue the Swiss National Bank | Another reason for low oil prices?

This commentary is from the archive, as your commentator is on holiday. It was first published in November 2014

Some time ago it was rumoured in the Forex market that certain large players were jousting with the Swiss authorities over the value of the Swiss franc, or “Swissie” as it is known. The idea was that they would put pressure on to increase the value of the currency in the knowledge that this was the last thing the Swiss wanted. At the same time the franc represented a safe haven for global funds at a time when economies around the world were under severe pressure because of the Global Financial Crisis and its aftermath. But the strong currency was not good for the sale of all those watches, pharmaceuticals and Toblerones that the Swiss like to export, especially into the Euro region.

Finally, the Swiss National Bank (SNB) announced that, no matter what happened, it was going to use as much of its foreign reserves as were required in order to prevent the EUR/CHF exchange rate falling below 1.20 (A fall in the pair means a stronger franc).

The results of this resolve can be seen on the chart above (the labeled period). Sometime after that the Euro strengthened naturally and the pressure seemed to off. Now, however, with the serious issues affecting the Single currency around uber-low inflation, high unemployment and low growth, the Swiss problem is back.

When will the SNB step in to reassert its position? Has it done so already?

Another reason for low oil prices?

I am indebted to Jon Hilsenrath of the Wall Street Journal for the insight that there may be a reason, in addition to the extraction of shale oil in the US, for the precipitate fall in the global price of the black gold. In a recent piece he highlights the significance of falling producer prices in China. While data for Chinese output and demand are not the most reliable, falls in wholesale prices indicate a rise in inventory and / or slowing demand.

This would impact on the use of oil, as much as anything else. As Hilserath says, “…overcapacity is overcapacity and empty apartment buildings are empty apartment buildings”. If he is correct in his analysis, and given the importance that China has assumed in the world, economies all over the planet might be facing a situation where the deflation problem could be something that is about to get a lot worse before it gets better.

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