«Chinese officials have reached their point. They are pledging to do whatever it takes to make sure that the anniversary of the Chinese Revolution is not marred by a slowdown of the economy.»<br>Photo: ZVG&nbsp;

«Chinese officials have reached their point. They are pledging to do whatever it takes to make sure that the anniversary of the Chinese Revolution is not marred by a slowdown of the economy.»
Photo: ZVG 

Das Interview

«China Has Its Draghi Moment»

Marc Chandler, Managing Partner and Chief Market Strategist at Bannockburn Global Forex, bets on a powerful comeback of the Chinese economy and thinks that the Swiss Franc is overvalued.

Christoph Gisiger

Deutsche Version

Around the world, investors are getting concerned about the economic outlook. Fears about a global slowdown are visible in the foreign exchange markets, where hard currencies like the Swiss Franc are gaining ground. However, Marc Chandler is optimistic that the dark clouds will thin out in the coming months. The renowned market strategist at Bannockburn Global Forex expects a positive surprise out of China, where government officials are taking all available means to grow the economy. Mr. Chandler compares their vigorous efforts to ECB chief Mario Draghi’s famous pledge in 2012 that he would do «whatever it takes» to maintain the unity of the Eurozone. In this extended interview with «The Market», he also argues that the Swiss Franc is overvalued and explains why a representative from Finland could become the next President of the ECB.

About Marc Chandler

Marc Chandler has been covering the global capital markets for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 2018. Chandler holds master's degrees from Northern Illinois University and the University of Pittsburgh in American History and International Political Economy. Currently, he teaches at New York University Center for Global Affairs, where he is an associate professor.  A prolific writer and speaker, he appears regularly in the press and writes the popular Marc to Market blog. In February 2017, Chandler's second book was published with the title «Political Economy of Tomorrow» and takes an insightful look on the concept of surplus.
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Mr. Chandler, the financial markets are at risk of losing momentum. What are the most important factors driving the Dollar, the Euro and other major currencies right now?
There are several things going on. First, investors all over the world are still concerned about the ongoing trade war between the US and China. That’s because there is a lot of collateral damage. You see this in German exports. They have been hit pretty hard which is partly the reason why the German economy contracted in the third quarter of 2018 and barely grew in the fourth quarter. Part of that is because of some issues domestically. But more importantly is the slowdown of China on the export side.

Yet, it sure looks like most investors are counting on a trade agreement.
The US-China trade talks look like they may very well continue through most of the second quarter, despite how much progress is being claimed. At the end of the day, it’s quite possible that the US and China will come up with some deal which not only stops a further escalation but also leads to the unwinding of some of the tariffs. But after that, it’s going to be all about the US and Japan and the US and Europe. President Trump is still threatening tariffs on autos which I compare to the 21th Century equivalent of Smoot–Hawley Act: the set of tariffs which triggered the Great Depression. Accounting for counter tariffs and other retaliatory actions, the shock to the global system would be a very big disruption.

And that's against a backdrop which already looks quite gloomy.
We’ve seen the OECD, the IMF and the World Bank revising down their growth forecast. Part of it has to do with the slowing of China. Even though most people in the investment community are suspect of Chinese economic data, we clearly see a slowdown. It’s evident, not necessarily in the data itself but in how many times the Chinese keep proposing efforts to stimulate the economy. So, maybe you can’t tell the extent of the illness except for the cures they are proposing - and the cures are getting more powerful, so it must tell us something about the seriousness of the sickness.

What’s going to happen next in China?
I think China is having its «Draghi Moment». Remember, in the summer of 2012 when the Euro came under pressure, European Central Bank President Mario Draghi made his famous pledge that the ECB would do «whatever it takes» to maintain the unity of the Eurozone. China is doing sort of the same thing today. This year marks the 70th anniversary of China’s revolution. But they are under pressure from the United States with the tariffs. So, the Chinese officials have reached their point. They are pledging to do whatever it takes to make sure that the anniversary of the Chinese Revolution is not marred by a slowdown of the economy. They want to prove that the US trying to choke China is not going to work and that the Chinese economy is going to grow despite the tariffs. So far, it doesn’t show up in the data, but in Q2 it will be there.

Speaking of Mr. Draghi: Who is going to be his successor when he steps down from the helm of the ECB in October?
Most likely it’s not going to be Bundesbank President Jens Weidmann. Some things policy makers do, we can’t forget but we can forgive. But Mr. Weidmann did something which I think is unforgivable. That was when he could not convince a majority of his peers at the ECB to agree with him to prevent the OMT bond buying program. So, he ended up testifying before court against the ECB. Of course, it might be perfectly legal to defend Germany’s rights, but I just think it leaves a bad taste. Also, there is another problem which is sort of a mechanical issue.

What do you mean by that?
Throughout Europe and the US, we are looking for ways to get to greater gender equality. As it happens, the only woman on the executive board of the ECB is Sabine Lautenschläger. So, if Weidmann is going to become president of the ECB, she would have to step down. That’s a problem.

You think Germany would approve if Mr. Weidmann is passed-by?
What I really admire about Chancellor Angela Merkel is that she has the ability to make a virtue out of a necessity. We know that the days of the big asset purchases are over. Also, the deposit rate, which applies when banks park money at the ECB overnight, has stood at -0.4% since 2016. This is the worst it’s going to get. If anything, the ECB is going to raise rates, not cut them again. So, does Merkel really need a German at the head of the ECB to pressure German interests? Probably not. At the ECB, there are other candidates who could help normalize monetary policy in an appropriate pace over time.

And why is this a virtue with respect to Chancellor Merkel?
What she is aiming for is to ensure that German interests are best represented in the post crisis era and the post Brexit era. For example, look at the Czech Republic, Hungary and Poland: They were part of the Soviet block and they wanted to join the EU, but now, they are having second thoughts. So, what can Chancellor Merkel do since she’s circled in by so many competitors, both in and outside of Germany? How can German interests be preserved? The answer is the EU itself, the European Commission. That’s why I wouldn’t be surprised to see Germany either at the head of the European Commission or its interests dominating after the European parliamentary elections at the end of May. That’s the place to shape the future for Europe - and that is what's at stake here.

So, let’s get back to the original question: Who is going to be the next President of the ECB?
There are two candidates from Finland and either one of them can get theoretically the job: Erkki Liikanen, a social democratic politician and former Governor of the Bank of Finland and Olli Rehn, a member of the Centre Party and current Governor of the Bank of Finland. One of them is on the inside track to be the next ECB president. It’s very fascinating: Depending on which party wins, the election in Finland on April 14th could determine who’s going to be the next ECB President.

What would be the implications for Switzerland and the Swiss Franc?
Thinking of Switzerland reminds me of a remark by Porfirio Díaz, a former President of Mexico, many years ago. He said: «Poor Mexico, so far from God and so close to the United States!» What he meant by that was Mexico's complex and unequal relationship with its gigantic northern neighbor.

What does this mean with respect to Switzerland?
It’s hard for me to see the SNB raising interest rates before the ECB does. That’s the problem of being a relatively small country at the border of a very large country. I grew up with history books which put the northern Atlantic in the center of the world economy. That’s not true anymore. These days are over. Last year, India already surpassed France and the UK to become the fifth biggest economy. Think about what’s going to happen in five, ten or thirty years from now? What’s the world going to look like? What’s the role of Europe going to be like? The answer is older and slower growing - and Switzerland fits into that picture.

How so?
Because of these changes, monetary policy in the Eurozone will continue to be easy and it’s going to be very hard for Switzerland to compete. Over time, Switzerland is going to have some difficult choices to make. It can join the EU, give up the Franc and get the Euro. I know this sounds unthinkable now. But the challenges are not going to go away anytime soon with the size of the Eurozone and the ECB’s monetary policy.

What are the implications for the Swiss Franc?
There are several ways to think about the Swiss Franc. One is an American way and it is about what’s going to happen with the Dollar. And, what drives the Dollar against the Franc is essentially what drives the Dollar against the Euro. An important driver are interest rate differentials. For example, if you have extra liquidity, you can give it to the SNB and they are going to charge you 125 basis points to hold on to your money. Or, you can go to the ECB and they charge you 40 basis points. Or, you can give your money to the Federal Reserve and it will pay you 240 basis points. So, the US has rarely offered such a large premium. This keeps the Greenback well supported and I can see the Dollar to Franc exchange rate rising to 1.05 or maybe 1.10 $/Fr.

Then again, especially in uncertain times like these, the Swiss Franc has the reputation to be a safe haven.
Sometimes a symbol and what’s it supposed to signify can be quite far apart from reality. The way the cap on the Franc’s value against the Euro was lifted in early 2015 was so disruptive that the SNB hasn’t been forgiven. What’s more, from a currency point of view, the negative interest rates in Switzerland are like an option built into the Franc. And that option is if the Eurozone gets broken up. But I think that risk is very low. A lot of my friends tell me that I’m silly: «How can you have a monetary union without a fiscal union?», they ask. «Europe is not an optimal currency zone», they say. But I don’t care because in the early days, the US wasn’t an optimal currency zone either.

Still, when the markets are in trouble the Franc usually gains ground.
The same thing goes for the Japanese Yen. So, people say: «This is a safe haven.» But on a more complicated level what really happens is something different: Financial institutions borrow money to fund their asset purchases. To do that, they borrow the Yen or the Franc at practically no cost. In a sense, it’s a big carry trade: They sell the Franc and with those proceeds they buy emerging markets, the S&P 500 or Apple's stock. But then, when these assets go down in price, they liquidate their positions and buy back the short Franc position which makes the Franc appreciate.

Isn’t it kind of ironic then that the Swiss National Bank itself is buying shares of US tech giants like Apple? What’s your take on the massive portfolio the SNB has built in US equities?
In some way, it’s consistent with the development among central banks in general. There are at least a dozen central banks which are adding equities to their portfolios. So, the Swiss National Bank buying stocks is not as uncommon as it might sound. Also, it’s very transparent. Even a guy like me, sitting here in New York, can check out the SNB's website and see what they own. Not a lot of central banks are that transparent.

That’s true. But isn’t it a different story when a central bank like the SNB buys foreign stocks?
This is where it gets tricky. For me it’s a sign that the SNB has too much money and that it doesn't know what to do with it. The same thing is true for a lot of US companies. They have so much money and they don’t know what to do with it, so they buy their own stock. The problem is that Switzerland doesn’t have a lot of debt. Therefore - unlike the ECB, the Fed or the BoJ - the SNB doesn’t have a lot of government bonds of its own country to buy. So, what foreign assets can you buy? If you want to protect the wealth of the Swiss people you want to have bonds and equity in a portfolio, especially for the long run.

Sounds reasonable, but there are political risks, too. For instance, the US Treasury has put Switzerland to a foreign exchange «monitoring list» of countries with currency market interventions. What if President Trump finds out one day that the SNB is buying claims on real American companies in the number of billions of dollars?
Sure, the ownership of US stocks could be a lightening rod politically. Especially if it’s coupled with some kind of bank secrecy issue and tax avoidance. There could be a problem. But I suspect that when it comes down to it, it will be seen as a vote of confidence in America. The US would actually put a positive spin on it: Even the conservative Swiss bankers want to buy US stocks. Here’s what’s really important: America is going to be running trillion-dollar budget deficits. So, more than ever, we need people who buy our assets, especially people who are not going to take control when it comes to voting or board seats etc. So, if we could choose what kind of owners we want for our stuff, we could do a lot worse than the Swiss National Bank.