Same overture, different finale:: Macquarie Research,

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Same overture, different finale
Event
 Unconventional monetary easing was taken to a new high by the Swiss
central bank’s attempt to weaken the Swiss Franc.
Impact
 Comparisons are being made with the late 1970s when the Swiss National
Bank also attempted to prevent a ruinous appreciation of the Swiss Franc.
 But while the overtures look similar, the endings are shaping up to be very
different. Rather than a burst of inflation that eventually requires significant
global monetary tightening, this time the finale will be more monetary easing
elsewhere.
 For asset markets it means a very different outlook from the trends of 30
years ago.
Analysis
 This should sound familiar. A long period of firm economic growth masked
some significant imbalances. Eventually these imbalances caused significant
strains in financial markets and the result was a period of upheaval in asset
prices. The consequent downturn in global economic growth was the worst
since WWII. While easier policies ended the recession, policymakers in the
US and Europe discovered that many of the old rules could no longer sustain
the recovery without some adverse consequences. Furthermore there was a
rising Asian economic power that greatly disrupted many key industries, partly
because of an undervalued exchange rate. This combination eventually led to
another bout of market chaos and another deep recession.
 Although the names and roles of the key players may have changed, the
script of the 1970s has a number of similarities to recent years. This week’s
exchange rate announcement by the Swiss National Bank (SNB) has
reinforced this comparison.
 In the late 1970s Switzerland was deluged with capital flows. Like 2011 this
was largely a result of chaos in financial markets, especially currency
markets. These flows into a perceived safe haven threatened devastating
consequences for Swiss producers. So just five years after Switzerland joined
with other countries and ended fixed exchange rates, in 1978 the SNB set a
maximum level for the Swiss Franc (CHF) against the Deutschemark (DEM).
 But while the policy worked it had some unfortunate consequences, especially
a much higher inflation rate in Switzerland. Of course inflation was rising
everywhere nevertheless, it was a lesson for a conservative central bank like
the SNB that was not forgotten.