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Swiss Franc Market Again Testing SNB Intervention Thresholds
Now that it has been made clear that the BIS and its member banks engage in gold swaps, which imply that gold price volatility has to be kept to a minimum, thus inviting the opportunity for, gasp, manipulation, Europe, once again seeing spiking commercial paper rates (yeah, that whole myth about dramatically better money markets was vastly exaggerated), was scratching its head earlier today as to what is a good safe haven for capital. And judging by the EURCHF chart below the answer soon presented itself. After getting sold in droves by the SNB last night as the Swiss Bank was intervening in the pair (contrary to posturing otherwise), today the market is once again testing the bank's resolve,to load up even more euros on its already burgeoning balance sheet.
And here is the reason why Europe is once again looking for a safe haven:
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"was scratching its head earlier today as to what is a good safe haven for capital. And judging by the EURCHF chart below the answer soon presented itself. "
deflation bitchez!
The ONLY "safe" haven is one which involves none of the following:
a) humans
b) HFT shit
c) banksters
d) politicians
as counter parties...
There are precious few (haha, like that play on words, subtle eh?) alternatives.
and once again, the ZH captcha shits a brick, and requires me to enter a FOUR digit answer into a box which only allows 3 digits. Nicely done.
I am not Chumba Bumba Numba Rotumba or anyone else...
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Let me take a wild stab (guess) at this.
You like physical gold.
I'd sure like to have a remote like in the movie "click" where you could skip all the boring things in live till it gets interesting
http://www.amazon.com/dp/B000HT386M?tag=jackasscritic-20&camp=14573&creative=327641&linkCode=as1&creativeASIN=B000HT386M&adid=1XTRJCFNPFKVE3F28674&
I just clicked mine and you disappeared. Fancy that.
(with a straight line like that, you didn't ask, you begged.)
("Do not be offended by comedy," said the dead jester.)
1039 WTF
note to self.. 1040 WTF
BUYBUYBUY
what a joke
With all the sabre rattling over Iran what the fuck is this about?
http://www.welovecostarica.com/public/46_US_Warships_Plus_7000_US_Marine...
46 US Warships Plus 7,000 US Marines On Route To Costa Rica?
On the 2nd July 2010 the Costa Rica Congress authorized the entry of 46 U.S. warships capable of carrying 200 helicopters and warplanes, plus 7,000 U.S. Marines "who may circulate the country in uniform without any restrictions" , plus submarine killer ships to the Costa Rican coast for "anti-narcotics operations and humanitarian missions' between 1st July 2010 until 31st December 2010.
With this kind of nation destroying firepower, it gives real meaning to the expression "war on drugs", but if this a real six month "war on drugs" we should expect to see some fantastic results, right?
Politicians representing the Acción Ciudadana (PAC), the Unidad Social Cristiana (PUSC) and the Frente Amplio (FA) political parties opposed the measure saying that the destructive force of the ships, helicopters and 7,000 US Marines is "disproportionate for the fight against drug trafficking."
On Sunday, the President of Costa Rica Laura Chinchilla said that the government does not intend to militarize the fight against drugs and the Minister of Public Security Jose Maria Tijerino stressed that this huge, powerful military force would be under the command of the US Coast Guard and not the US Navy.
(1st comment): Run Jim Willie! Run!
(2nd comment): Under the command of the US Coast Guard? Oh you mean BP!
Dunno about that but I'm certainly scratching my head about the index moves - can anyone explain it other than HFT mania)?
DavidC
A quaint old construct called valuation.
3% 10-Year Treasuries and 9% earnings yields...
In Vietnam, they attempted to outlaw gold trading because the Dong had collapsed. So if the Swiss were really serious about devaluing their currency and making it stick, they would buy gold instead of swapping it.
If the S & P closes above 1040 today, i will run around my kitchen naked shouting "I love you Timmy"..... morons... stack that wheat...
The SNB exit strategy from unconventional policy measures continues to slowly move ahead. In May, the massive FX intervention temporarily derailed the strategy as it injected huge franc liquidity into the system and catapulted the balance sheet to a new record at CHF300bn, almost three times the pre-crisis level. This shock may have led to a change in assessment communicated at the 17 June decision, when the SNB noted that deflation risks had ‘largely disappeared’, implying that FX intervention was not necessary any longer. Since then, the SNB has further stepped up its sterilisation efforts with increased CHF bill issuance and, on Monday, restarting 1-week reverse repos.
Assessing the extent of the operations is not straightforward as data is published with a considerable lag. The most recent information we have is from 17 June when Board member Danthine noted that the total amount of SNB Bills outstanding was about CHF80 bn, which compares to CHF18 bn when they were started in October 2008. The SNB has continued to stress that mopping up the excess liquidity is not technically a problem, and indeed in the current global environment there is plenty of demand for CHF assets even at very low yields. In this week’s 1w reverse repo the rate was increased to 9bp from 5bp previously and for last week’s 3m bills the rate was raised to 12bp.
Why Libor remains low
We have been arguing that the SNB exit strategy will consist of three major steps. First, FX intervention will be discontinued. Second, excess liquidity will be reabsorbed. And third, rates will be hiked. We believe that step one has occurred already and that we are currently seeing step two as a condition for step three, which UBS economics continues to expect for September. The problem for the SNB remains the exceptional uncertainty about the global outlook with many observers arguing for a double dip scenario and deflationary risks in many G10 countries. Yesterday’s Swiss CPI drop back to 0.5%y/y was a timely reminder. As a result, further franc appreciation remains unwelcome even though we continue to believe that it would require substantially more dramatic developments for the SNB to purchase euros once again. The SNB will thus like to see the benchmark 3m Libor rate move back to the 25bp level, but at the same time has so far taken only very cautious action to lift it from the current 11.7bp level.
Still abundant liquidity
The still abundant CHF liquidity is a major reason for the strongly negative basis swap. Chart 2 shows how the basis swap reached levels of around -70bp following the massive FX intervention in May, while forward-implied yields dropped to lows of around -170bp. For both indicators, this was close to the record levels reached during the height of the financial crisis when USD liquidity was at a record premium. The SNB sterilisation efforts have now led to the basis swap and implied yield rising back from the extremes, even though they remain well below the levels seen earlier this year. Further drainage of liquidity may result in the basis swap rising back to levels seen prior to the intervention. However, even those levels were around -20bp, and as a result, 3m Libor is unlikely to rise much above current levels unless the SNB raises rates in their bill issuance. If it wanted to, the SNB could bring the 3m Libor back to 25bp in a single auction by simply moving the 3m bill yield to this level.
Where are the francs?
For the Swiss franc, any indication of the SNB moving bill yields and reserve repo rates more aggressively would be supportive. In fact, this is probably the main reason why the central bank has been relatively cautious so far. However, as noted above, the bank will likely be keen to see the 3m Libor move back to 25bp over the next few weeks as this would be a precondition for a hike of the target range when the time comes. There have been obvious concerns about an overheating in the real estate sector with prices of flats and houses in May rising 6%y/y and 4.8%, respectively, which in the Swiss context is excessive. As the Quarterly Bulletin noted, ‘we continue to observe a considerable increase in loan volumes for residential mortgages. This increase, along with movements in real estate prices, represents a risk that demands the full attention of the SNB’. Record low yields across the curve have obviously done nothing to cool this trend. The problem is that even though franc strength tightens monetary conditions overall, it does nothing to cool the real estate sector. Only rate hikes can achieve that.
Another question which has puzzled observers is where the franc liquidity has ended up that was injected via the FX intervention. In particular, the francs do not seem to have been spent on assets such as Swiss equity, as the SMI has underperformed the Euro Stoxx, if anything (Chart 3). Looking at the UBS FX flow monitor, in the period since March 2009 when the FX intervention began, asset managers accumulated about 47% of the overall EURCHF longs with hedge funds at around 21% and corporates 20%. During the height of the intervention in spring, the hedge fund share was higher at around a third, suggesting that speculation played a significant role in the whole episode. The flow chart shows that since the all-time record EURCHF shorts at the beginning of June, positioning has now eased even if it is still heavy enough to potentially trigger a spike in the cross (Chart 4). However, we think the risk of such a correction is relatively limited as long as the fundamental factors continue to point to further franc strength, including a relatively hawkish rate outlook (at least compared to the eurozone), less regulation risk and healthier fiscal situation.
Conclusion
We continue to argue that recent SNB communication suggests a determination to pursue an exit strategy that will consist of mopping up excess liquidity and eventually raising interest rates. Containing franc strength has largely been removed as a policy target, at least unless deflationary risks were to re-emerge. As a result and given the continuously favourable franc fundamentals, EURCHF will likely trade lower for longer and may have to overshoot to around 1.25 or even lower before the market changes course.
UBS FX Note: SNB exit strategy unfoldingWednesday, July 7, 2010
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