Three years ago alarmed by the rate at which the Swiss Franc
was appreciating against the Euro the Swiss central bank that it would limit
the EURCHF to not less than 1.2000 .
A dramatic appreciation of the Swiss Franc against the Euro
would hurt its export and tourism industry, the corner stones of the economy.
The fundamentals – the general health of Europe’s versus the
Swiss economies, dictated that the Franc should strengthen against the Euro.
Two weeks ago – and up to $200b or half their GDP, spent
holding the peg, the Swiss central bank gave up which led to a dramatic 40
percent appreciation of the Franc against the Euro in less than an hour.
The Swiss have suffered the very same fate they were trying
to avoid. Their exports now will cost consumers up to 20% more than last week,
which may not be good for sales.
"It’s never a good idea to bet against the market, even if you believe the market is wrong. As they say the market can remain irrational longer than you can remain liquid....
There has been a long history of government’s trying to play
the market – often a political decision not an economic one.
The British tried and when they failed trader George Soros
is supposed to have made a billion pounds. The Argentine’s wrote a one-for-one
peg into their constitution when they couldn’t sustain it their currency
plummeted, triggering an economic crisis in the south American nation – and
cost as the initial Bujagali project. The promoter American firm AES were
burned by their huge investments in Argentina and couldn’t afford Bujagali.
Closer to home Zimbabwe tried to print itself out of a bad
economic situation, this has resulted in the south African nation doing away
with its own currency and now transacting only in hard currencies.
When political expediency overrides good economics the end
result is never a happy one.
The dollar strength is sweeping around the globe and Uganda
has not been immune to its impact. The Uganda shillings has is 15 percent
weaker than it was at this time last year, which ordinarily would cause stress
for us as we are mainly an importing country.
The dollar is now teethering on the brink of sh2,900 the
highest it has been since October 2011, and as if on cue the calls for
government to intervene to stop the dollar rise are mounting.
Uganda imports more than it exports, so most of the
discomfort is being felt by our importers. The exporters as long as they have
little foreign input and looking forward to improved margins.
Thankfully global oil prices have also been in decline.
Higher oil prices would have meant a higher oil bill and this would have a
ripple effect in the economy as transportation charges rose.
"Trying to hold a currency to a certain level regardless of the reality is not unlike a person who tries to maintain his previous standard of living, when things have become costlier or when his income is less than previously...
Invariably he will dip into savings and once those are
exhausted the collapse will be dramatic.
The smart thing to do would be
to cut the cost of living to match reduced income. By trying to defend a
certain rate country’s end up dipping into their savings and when they
inevitably have to stop the collapse can be dramatic.
Of course the Swiss National Bank’s action went largely
unnoticed here. However the losses sustained by the retail forex brokers
accounted for Alpari UK, a popular broker for Ugandan retail traders.
It’s a bit complicated but suffice it to say that a few
clients’ accounts were not only wiped out but went into negative balances,
which were reflected as losses to the broker. In the space of hours Alpari went
from one of the largest brokers to zero, a testament to how risky the forex
trade can be.
The company tried to get a buyer at the end of last week but
when that failed went immediately into receivership.
For people who had accounts in theory the funds are safe but
it might take a while redeeming them as receivers KPMG go through the process.
