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  #341  
Old 04.08.2011, 10:41
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Re: Swiss Franc Climbs to Record High

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Great post but Im a bit lost on the maths
I've been tardy with the maths, let's tighten it up:


Gold sales (gold prices in USD/ounce)

1. 1,300 tonnes of gold sold at average price of $350, from 2000-2005
(speech by Hildebrand on this "success" - http://www.bis.org/review/r050509b.pdf; Figure 3 ironically shows that the SNB began its gold sales just as gold was entering its bull run)

2. A further 250 tonnes of gold disposed from 2007-2008 - gold was about $600-700 over this period

3. No further gold sales, leaving official gold reserves at 1,040 tonnes. Gold spot price now above $1,650.


SNB balance sheet:

1. 2007 - loss of CHF 1.3 billion

2. 2008 - loss of CHF 4.7 billion

3. 2009 - profit of CHF 9.96 billion

4. 2010 - loss of CHF 19.2 billion

5. First half of 2011 - loss of CHF 10.8 billion


Swiss population: around 7.8 million


You'd have to delve into the SNB balance sheets to work out the exact losses, but these losses will be amplified as the SNB has "invested" in currencies, all of which are weak. Had they kept the gold however they would have registered at least a CHF 50 billion profit.

There are also other factors which could later affect the SNB's balance sheet e.g. toxic, illiquid assets from UBS, and the SNB's gold lending activities (i.e. not all the 1,040 tonnes of gold is there; the SNB might not be able to get their gold back).
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  #342  
Old 04.08.2011, 10:45
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Re: Swiss Franc Climbs to Record High

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There are also other factors which could later affect the SNB's balance sheet e.g. toxic, illiquid assets from UBS, and the SNB's gold lending activities (i.e. not all the 1,040 tonnes of gold is there; the SNB might not be able to get their gold back).
What about the interest on the Euros bought compared to deposit rates in CHFs?
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  #343  
Old 04.08.2011, 10:59
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Re: Swiss Franc Climbs to Record High

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The SNB in the 70s under Fritz Leutwiler had capital controls plus extensively manipulated the CHF exchange rate (summary of measures taken then are available here: http://www.cbo.gov/doc.cfm?index=5981&type=0). The penalty for exchange rate manipulation was heavy inflation - which only became apparent several years later, as there is about a 2-year time lag for inflationary effects to work its way through the economy. I remember reading that Leutwiler regretted the move (from some speech he gave in the 70s) - but my memory isn't so clear on that point now.


The magnitude of today's changes v.s. the 70s situation however are of a different order. Today almost all major currencies are weak, there's no longer any Deutschmark. Is the CHF "overvalued"? If it is, then SNB would be right to intervene. However, it's difficult to decide if the CHF is "overvalued" as other currencies are going through an existentialist crisis themselves... there's simply too much uncertainty.

However, what is clear that it is almost pointless for the SNB to go against the markets. The SNB's forex intervention yesterday was an epic failure - see chart here: http://www.zerohedge.com/news/swiss-...on-epic-fail-2


Inflation in CH would likely be heavy. 2% inflation is actually very high - as Paul Volcker pointed out, that means in a generation's time you lose half your purchasing power. And we know that real inflation is several times that of reported inflation statistics.

The recent SNB moves are practically meaningless. They might as well tighten monetary policy to dampen inflation, as any interest rate changes would probably have negligible effect on the CHF exchange rate (little change to investor appetite).

Hildebrand just isn't very good.


Hildebrand had previously talked about the "success" of SNB's gold sales in the early 2000s, which turned out perhaps to be the biggest blunder in the history of finance - about half the SNB's gold hoard was sold off at an average price of $350. At today's gold prices, they have effectively lost about $55 billion - that's almost $8 billion per Swiss citizen, and this figure is sure to grow. Of course, this fact doesn't appear on the balance sheet unlike the euros.

So including forex losses, the SNB has lost about $9-10 billion per Swiss citizen. Who cares about unemployment and economic output - when everyone could have afforded to be unemployed! Each receiving $10 billion and enjoy high living for the next 100 years...

Alternatively, it would have been more effective to directly subsidise industry, bailing out companies, expanding social welfare - than having forex intervention/quantitative easing.


Do SNB's losses matter?

SNB's money is the people's money. There's a reason why the CHF used to have a legal 40% gold backing (this requirement has since been removed by referendum, which in my view was not wise). The idea is that the central bank purchases good assets - and gold used to be such in the past (perhaps today too, but the gold markets are now heavily rigged). The SNB could alternatively purchase mines, islands, additional land in Asia... so long as they qualify as a good asset. Currencies and foreign bonds are assets which might not fall into this category as they deteriorate in value (and perhaps of no value). What the SNB has been doing is almost equivalent to giving away CHF (i.e. Swiss assets) for crappy assets.

Both UBS and Credit Suisse are not faring well, and are heavily exposed to future financial shocks - this could eventually weigh heavily on the CHF. Their American operations would be better to be spun off (as a friend point out, they are really American banks). From this perspective, the strength of the CHF is illusory (there is a lot of CHF-denominated debt held in other countries too). As the current monetary order is collapsing and the situation seems to have little prospect of improving - SNB's decision to sell its gold hoard has not only impoverished the country, but it has limited the SNB's ability to act which could eventually prove fatal not only for the CHF but for Switzerland. We'll see.
YES, Mr Leutwiler regretted the inflation which could not be curbed fully, but he NEVER regretted what he did, as there was no alternative. Mr Hildebrand knows all this well, and therefore was UNwilling to act as now.

People's money indeed, but money to be used to save and guard the people and the economy on which it depends. Even if the finance-markets oppose. What matters is that the international markets of the export industry and of the inbound-economy will react positively or at least not too negatively if the CHF stabilizes. Some "Economie-Suisse" chap yesterday day-dreamed about the Euro becoming CHF 1.30 again. This is rubbish. A middle line is to be found between the "actual" value of the Euro of CHF 1.33, and the speculative value of CHF -.80 which is between 1.05 and 1.15 . THIS is what Nick Hayek meant

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One could also argue that the SNB's blunders of selling gold at the bottom of the market and buying 320billion euros earlier this year at CHF1.40 were moves that actually benefited the franc by holding down its value somewhat.

If the SNB still held the gold at today's rates and had not bought into the falling euro, what would the franc be worth now??
2 Euros ? and the Euro being CHF ----.50

************************************************** ***
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  #344  
Old 04.08.2011, 11:04
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Re: Swiss Franc Climbs to Record High

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What about the interest on the Euros bought compared to deposit rates in CHFs?
I suppose the interest on the Euros is included in the annual profit & loss numbers.

I see the Bank of Japan has jumped in & is buying US$s (maybe also euros) with the aim of weakening the yen.
This seems to have somehow supported the CHF which is back to 1.11 euro after falling to 1.08 overnight.

Not sure how big an effect the planned 30 billion increased liquidity of the CHF will have on the CHF/euro rate. SNB spent over 100 billion last year buying euros without any long term effect so 30 billion is a small bid. Positive is that the SNB will not directly assume any currency exchange risk; they have delegated this to the banks .

Anyway nothing forces the banks to use the new liquidity to buy euros. For example, they could keep it in reserve against possible new fines for tax avoidance schemes or against the crash in the East European CHF mortgage market or to buy up smaller banks or to buy Swiss land/property or to buy gold.....&&&&

3 month CHF libor remains around 0.175% despite the announced "interest rate cut"
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  #345  
Old 04.08.2011, 11:07
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Re: Swiss Franc Climbs to Record High

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I suppose the interest on the Euros is included in the annual profit & loss numbers.

I see the Bank of Japan has jumped in & is buying US$s (maybe also euros) with the aim of weakening the yen.
This seems to have somehow supported the CHF which is back to 1.11 euro after falling to 1.08 overnight.

Not sure how big an effect the planned 30 billion increased liquidity of the CHF will have on the CHF/euro rate. SNB spent over 100 billion last year buying euros without any long term effect so 30 billion is a small bid. Positive is that the SNB will not directly assume any currency exchange risk; they have delegated this to the banks .

Anyway nothing forces the banks to use the new liquidity to buy euros. For example, they could keep it in reserve against possible new fines for tax avoidance schemes or against the crash in the East European CHF mortgage market or to buy up smaller banks or to buy Swiss land/property or to buy gold.....&&&&

3 month CHF libor remains around 0.175% despite the announced "interest rate cut"
I suspect that by increasing liquidity, it will limit banks enthusiasm to accept more deposits, hence reducing demand for CHFs. A handy pick up for anyone looking to borrow money for a mortgage etc at the moment.
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  #346  
Old 04.08.2011, 12:11
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Re: Swiss Franc Climbs to Record High

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I've been tardy with the maths, let's tighten it up:


Gold sales (gold prices in USD/ounce)

1. 1,300 tonnes of gold sold at average price of $350, from 2000-2005
(speech by Hildebrand on this "success" - http://www.bis.org/review/r050509b.pdf; Figure 3 ironically shows that the SNB began its gold sales just as gold was entering its bull run)

2. A further 250 tonnes of gold disposed from 2007-2008 - gold was about $600-700 over this period

3. No further gold sales, leaving official gold reserves at 1,040 tonnes. Gold spot price now above $1,650.


SNB balance sheet:

1. 2007 - loss of CHF 1.3 billion

2. 2008 - loss of CHF 4.7 billion

3. 2009 - profit of CHF 9.96 billion

4. 2010 - loss of CHF 19.2 billion

5. First half of 2011 - loss of CHF 10.8 billion


Swiss population: around 7.8 million


You'd have to delve into the SNB balance sheets to work out the exact losses, but these losses will be amplified as the SNB has "invested" in currencies, all of which are weak. Had they kept the gold however they would have registered at least a CHF 50 billion profit.

There are also other factors which could later affect the SNB's balance sheet e.g. toxic, illiquid assets from UBS, and the SNB's gold lending activities (i.e. not all the 1,040 tonnes of gold is there; the SNB might not be able to get their gold back).
Bear in mind that the USD traded above 1.80 to the Franc in 2000, so the average sale price in CHF may well have been over $700 in totays dollars!

Also the the Gold sales in the 6-700 dollar range wen't so shabby as the CHF was worth 50% more than today.

So your stated 50 chf Billion profit, is probably nearer half that figure.
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  #347  
Old 04.08.2011, 14:49
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Re: Swiss Franc Climbs to Record High

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I see the Bank of Japan has jumped in & is buying US$s (maybe also euros) with the aim of weakening the yen.
This seems to have somehow supported the CHF which is back to 1.11 euro after falling to 1.08 overnight.

Not sure how big an effect the planned 30 billion increased liquidity of the CHF will have on the CHF/euro rate. SNB spent over 100 billion last year buying euros without any long term effect so 30 billion is a small bid. Positive is that the SNB will not directly assume any currency exchange risk; they have delegated this to the banks .

Anyway nothing forces the banks to use the new liquidity to buy euros. For example, they could keep it in reserve against possible new fines for tax avoidance schemes or against the crash in the East European CHF mortgage market or to buy up smaller banks or to buy Swiss land/property or to buy gold.....&&&&

3 month CHF libor remains around 0.175% despite the announced "interest rate cut"
30 bio put into the Swiss money market is equal to 300 bio used to buy Euros, and so is far far more. What people will do with the money put into the Swiss money market does NOT matter. The money is NOT expected to be used for investments in the Euro-Zone, because Euro-losses of commercial bank would NOT be "Buch-Verluste" but clear commercial losses. Best would be, if the money would be used CH-internally.

I hope that the Japanese buying of US$+€ will push the $+€ UP internationally. The move damaged the CHF by pushing it up, as the Japanese caught the headlines away from Switzerland. But in the longer term, by strengthening the two big currencies will support the CHF in bringing its exchange-rate down.
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  #348  
Old 04.08.2011, 15:18
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Re: Swiss Franc Climbs to Record High

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Bear in mind that the USD traded above 1.80 to the Franc in 2000, so the average sale price in CHF may well have been over $700 in totays dollars!

Also the the Gold sales in the 6-700 dollar range wen't so shabby as the CHF was worth 50% more than today.

So your stated 50 chf Billion profit, is probably nearer half that figure.
The proceeds of the gold sales were "invested" in USD, euros, and other long-term bonds, so your analysis is incorrect.

If we start from 2003 - versus the CHF, the USD has depreciated by almost 45%, EUR by 30%. Gold has gone up 4.5 times versus the USD, that's about 2.6 times versus the CHF. You still have to consider the separate forex losses due to SNB's expansion of their balance sheet over the past few years.

I actually don't think the forex losses are that grim - the CHF could eventually soften against the EUR and the USD, and the SNB has diversified its forex reserves. However, gold would likely continue on its upward trend for a while, as all central banks are debasing currencies (including the SNB - monetary charts here: http://www.snb.ch/ext/stats/statmon/...Geldmengen.pdf) and there is just too much uncertainty.


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YES, Mr Leutwiler regretted the inflation which could not be curbed fully, but he NEVER regretted what he did, as there was no alternative. Mr Hildebrand knows all this well, and therefore was UNwilling to act as now.
The price of manipulating the exchange rate was inflation - you couldn't have it any other way. So I am not sure how Leutwiler could have 'regretted' inflation but not the currency peg. Leutwiler tried holding down the exchange rate, but he knew it was absurd and gave up: "I’m going to have to get out - I’m going to stop buying dollars to hold the rate."

Also, the SNB had exchanged their dollars for gold before Bretton Woods collapsed. Today's SNB under Jean-Pierre Roth and Hildebrand have done the opposite - so the SNB is not in a position of strength as it was in 1971.

Sometimes I wonder what Leutwiler would've thought of today's situation... he knew that the international debt burden was the elephant in the room. Leutwiler was also of the opinion that the gold standard was the best monetary system mankind has ever had.

But a lot of things have changed since 1971. Even having physical gold is not absolutely "safe" i.m.o., as the gold and silver markets are very opaque and heavily rigged. The situation today is much more complicated.

Switzerland is but a small country - it will have to be subjected to the vicissitudes of larger countries, and share in the fate of the global economy. As it always have been...

But the SNB is essentially "speculating" now - it's a dangerous game. There would be no need of this had they kept their gold hoard, but there's no point regretting past decisions now.
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  #349  
Old 04.08.2011, 15:31
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Re: Swiss Franc Climbs to Record High

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30 bio put into the Swiss money market is equal to 300 bio used to buy Euros, and so is far far more. What people will do with the money put into the Swiss money market does NOT matter. The money is NOT expected to be used for investments in the Euro-Zone, because Euro-losses of commercial bank would NOT be "Buch-Verluste" but clear commercial losses. Best would be, if the money would be used CH-internally.

I hope that the Japanese buying of US$+€ will push the $+€ UP internationally. The move damaged the CHF by pushing it up, as the Japanese caught the headlines away from Switzerland. But in the longer term, by strengthening the two big currencies will support the CHF in bringing its exchange-rate down.
About "30 bio put into the Swiss money market is equal to 300 bio used to buy Euros"

Could you please explain?
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Old 04.08.2011, 15:37
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Re: Swiss Franc Climbs to Record High

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But the SNB is essentially "speculating" now - it's a dangerous game. There would be no need of this had they kept their gold hoard, but there's no point regretting past decisions now.
agree, but we can at least get rid of the ones responsible.

i often think that it would be better to replace all central bankers with a rock or some other such inanimate object as i think in most cases a 'do nothing at all' approach would have been superior to whatever hair-brained scheme the central bankers cook up...
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Old 04.08.2011, 16:28
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Re: Swiss Franc Climbs to Record High

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agree, but we can at least get rid of the ones responsible.

i often think that it would be better to replace all central bankers with a rock or some other such inanimate object as i think in most cases a 'do nothing at all' approach would have been superior to whatever hair-brained scheme the central bankers cook up...
There is actually an instantaneous solution to the current crisis - just repeal all legal tender laws across all countries. Central banks can then do whatever they want. Global economy will recover in less than a year.

The parallel gold franc proposal is in some ways moving in that direction...
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  #352  
Old 04.08.2011, 16:32
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There is actually an instantaneous solution to the current crisis - just repeal all legal tender laws across all countries. Central banks can then do whatever they want. Global economy will recover in less than a year.

The parallel gold franc proposal is in some ways moving in that direction...
Think the Chinese might get slightly miffed when the septics tell them to whistle for their 2 trillion
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  #353  
Old 04.08.2011, 16:34
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Re: Swiss Franc Climbs to Record High

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About "30 bio put into the Swiss money market is equal to 300 bio used to buy Euros"

Could you please explain?
It has been explained by people far better than me at length in recent days. As the "mass" of the CHF is less than 5% of the "mass" of the Euro (at today's rates), 10% of the sum pumped into the Euro will have a serious impact inside Switzerland. And this argument is shared by most leaders here in Switzerland.
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  #354  
Old 04.08.2011, 17:45
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Re: Swiss Franc Climbs to Record High

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It has been explained by people far better than me at length in recent days. As the "mass" of the CHF is less than 5% of the "mass" of the Euro (at today's rates), 10% of the sum pumped into the Euro will have a serious impact inside Switzerland. And this argument is shared by most leaders here in Switzerland.
I hope so - but the CHF is now back where it was versus euro & US$ before the SNB made their announcement.

Usually what happens when you increase money supply in a country is that the local interest rates fall. This encourages people to move their money to other countries that pay higher interest rates so buying foreign currencies & driving down the exchange rate.
I do not see that happening here - I mean "people to move their money to other countries" - but then what do I know!!
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  #355  
Old 04.08.2011, 17:58
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Re: Swiss Franc Climbs to Record High

Back under 1.09 again.

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Old 04.08.2011, 18:14
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Re: Swiss Franc Climbs to Record High

I'm no financial expert so I'm happy to corrected (as if EFers need an invitation for that) but what seems to be the most concerning point for me is that currently there doesn't seem to be an actual crisis within the Euro room. All this movement seems to be from speculating that in the future there will be a crisis. It started with Ireland's rating seemingly being needlessly downgraded and now people are saying 'Spain, Italy are going to default, Spain Italy are going to default.' despite there didn't seem to be any signs that they would. The investors because of this are reluclant to lend to them which makes it more expensive for the countries to lend money which makes it harder to pay the interest...... It becomes a self fulfilling prophecy.

I dread to think what will happen if they need a bailout!
I feel some powerful people are betting on this and are determined to make it happen
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Old 04.08.2011, 18:45
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Re: Swiss Franc Climbs to Record High

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I'm no financial expert so I'm happy to corrected (as if EFers need an invitation for that) but what seems to be the most concerning point for me is that currently there doesn't seem to be an actual crisis within the Euro room. All this movement seems to be from speculating that in the future there will be a crisis. It started with Ireland's rating seemingly being needlessly downgraded and now people are saying 'Spain, Italy are going to default, Spain Italy are going to default.' despite there didn't seem to be any signs that they would. The investors because of this are reluclant to lend to them which makes it more expensive for the countries to lend money which makes it harder to pay the interest...... It becomes a self fulfilling prophecy.

I dread to think what will happen if they need a bailout!
I feel some powerful people are betting on this and are determined to make it happen
wow. must be nice in your world. we have the biggest ever economic apocalypse happening right now and you say there is no crisis?
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Old 04.08.2011, 19:23
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Re: Swiss Franc Climbs to Record High

Yeah sorry, wrongly phrased. What I wanted to say is that there hasn't been one incident that has caused the Euro to crash the past week or two or has there? Is it not basically that investors have suddenly decided that the size of Spain's and Italy's debt is a big problem despite them having this debt for years or even decades?

And to answer your question my world is (still) pretty nice thanks
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Old 04.08.2011, 19:53
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biggest ever economic apocalypse
... since the last one, you mean. Like hyperinflation post-WWII, for example (those are Hungarian banknotes, below):



or these little gems:



But yeah, this global currency devaluation thing is quite bad. But only if you're Swiss, Australian, Chinese or Canadian and trying to sell your widgets to Europeans or Americans.* If your trade is trans-Atlantic, your currency pairs are still roughly in the same ratio as before. Roughly.

* Situation slightly abridged for brevity.
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Old 04.08.2011, 20:09
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...we have the biggest ever economic apocalypse happening right now...
*Chills, and takes another swig of beer*

Well, there's bugger all I can do about it, is there?
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