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Entering the Intervention Zone

Bruce Krasting's picture




 

Entering the Intervention Zone

Courtesy of Bruce Krasting 

One Around Two

We are near the edge on a few situations in the FX markets. I'm watching the EURCHF and the USDYEN. The market traded EURCHF to a low of 1.2032 today. It closed at a (slightly) safer 1.2044. I would not be surprised to see this cross trade very close to the official peg of 1.20 in the not too distant future.

 

There is no doubt in my mind that the Swiss National Bank (SNB) will be involved when and if the EURCHF hits the 1.2000 mark. My guess is that 99% of everyone else who “votes” in this market believes the same. This begs a question.

“If everyone knows the cross can’t go below 1.20, then why in hell is it sitting 44 lousy pips away from the peg?”

The EURCHF is a very good funding currency for a carry trade. Yields on French and Italian bonds make it attractive, given that Swiss money can be had through the swaps with a negative Vig. It seems like the market wants to trade the EURCHF very close to the peg for the time being. That’s odd, given that it’s a “100% sure thing” that the SNB will protect the downside.

The Dollar is a sideshow for the Swissie. I doubt many are trading USDCHF these days. It’s worth noting that the Dollar got beat up for five big figures against the Euro the past week or so. Normally when you see Euro strength versus the dollar, you also see it in the EURCHF cross. Not this time around. It does make me go Hmmmm.

I think there are scenarios where the EURCHF could trade to the peg. If, by surprise… the Greek deal fell apart, money would move into the Franc. It could be something subtler. A reminder of just how fragile the Euro system is these days might do it. For example, this headline from the WSJ that came out after the NY close may scare the crap out of many people with bank accounts in the EU.

 

If the EURCHF does test the peg, it will probably happen during European trading hours. I expect the SNB’s new boss, Thomas Jordan, will stand up and bid 1.1999 for all the Euros the market has on offer.

A side story to this is what happens if the cross breaks the peg outside of Euro trading hours. What if some hedge-fund types lean on it at 3 PM on a Friday in NYC? The same question arises during Asian hours. If Monday morning, in Australia, the cross is offered at 1.1997, without a bid, it will create a big splash. That "100% sure thing" will immediately come into question. Mr. Jordan doesn’t want that.

There are only two possibilities for intervention outside of the Euro time zone:

1) The SNB can rely on the Central Banks of Australia, Japan and the USA. Those CB’s would act on behalf of the SNB during their respective market hours.

But, realistically, there is no chance in hell for this. The US Fed can’t play in this sandbox. For the Fed to participate in an effort to weaken the Franc would make it (and Tim Geithner) look silly. The USA has been threatening China with all manner of sanctions over China’s policy of maintaining an artificially weak currency. The Fed simply can’t help Switzerland do the same thing.

2) The SNB will give “resting” orders to commercial banks. The most likely name for this would be UBS. It would not surprise me if one of the other big banks had a turn at doing the SNB’s calling. JPM and Bank of Tokyo are likely candidates, Barclays may get put on the list if persistent intervention was required. The resting order might be:

To: Bank of Tokyo, Tokyo - FX Department

Firm order, good till cancelled. SNB offers to purchase up to Euro 200 million versus CHF at 1.1999. Call Hans -immediately- if the first E50mm is executed.

With this, we get the EURCHF trading “one-around-two” (one pip around 1.200 or, 1.1999 – 1.2001).

A few thoughts about resting orders from CBs.

*The information always leaks.

*The bank operating for the SNB will be named.

*A bank that has a large resting order from a CB has a huge tactical advantage against other market players. (I know, I played this game.)

*A move into the intervention zone will rile other markets, most notably in the Euro funding markets. 

 

A Yen for a Yen Trade

The USDYEN is dangerously close to becoming an issue (again). The NYC low was 76.08. Anything under 76.00 might bring in the Bank of Japan (BOJ). The last time we were here was on 10/27. The chart:

 

Japan desperately needs a stimulus. It has gone to the cupboard for more ZIRP and deficit spending too many times. At 220% debt-to-GDP, its credit card is maxed out. My reading of the Japanese press is that more debt as a stimulus is not a viable alternative. (They are talking about doubling the VAT to 10%, to cover a portion of the deficits. Given that painful effort, they are not going to turn around and borrow more.)

The only option left is to fiddle with the FX rate. It would make a very big difference if the USDYEN was 85. The Japanese Finance Ministry folks must be looking at the SNB's actions with envy. A 15% devaluation off the low, coupled with a future exchange rate that was (somehow) pegged to the USD, or a basket of currencies, would be just the ticket.

Here again, I don’t think this will happen. The boys at the BOJ know that they would have to absorb a trillion in additional reserves if they drew a line in the sand with a currency peg. That doesn’t mean that they are not thinking about it. Some “Peg Talk” by some MITI types might get the ball rolling.

I think we'll see a break of 76.00 soon. The sparks will fly somewhere around 75.60. Given the deteriorating conditions in Japan since the October intervention, I do wonder if the BOJ might be somewhat more aggressive this time around.

 

 

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Tue, 03/13/2012 - 09:10 | 2249961 Gelir
Gelir's picture

Sohbet Chat Hi, just wanted to let you know that I really appreciate your post. Torna

Thu, 04/26/2012 - 09:21 | 2376306 jaffa
jaffa's picture

Interventions have been used to address serious personal problems, including, but not limited to, alcoholism, compulsive gambling, drug abuse, compulsive eating and other eating disorders, self harm and being the victim of abuse. Thanks.
Regards,
reverse email

Thu, 02/02/2012 - 11:28 | 2119915 crzyhun
crzyhun's picture

BK I only understand a 1/4 of what your are saying, not ashamed to admit. The situation is critical, intensive care. There is no such thing as muddle through. Systems are busy being born or busy dieing. Homeostatis is like a P/L statement, a picture in a moment. Stay alert is all I can do.

Thu, 02/02/2012 - 10:37 | 2119682 outsidertrader
outsidertrader's picture

This is not the first time the SNB has done something like this. In the late 1970's the SNB capped the CHF against the Deutschemark. It worked. The cap held and the CHF gradually weakened against the DM over time. Remember that Bruce?

 

Thu, 02/02/2012 - 11:29 | 2119918 GMadScientist
GMadScientist's picture

This one time, at band camp...

Thu, 02/02/2012 - 11:43 | 2119987 outsidertrader
outsidertrader's picture

And your point is?

"This time it's different"?

Care to advance an argument for that?

 

Thu, 02/02/2012 - 09:24 | 2119455 trilliontroll
trilliontroll's picture

repeat of comment:

«Wegen abnormer Anfragenflut mieten Schweizer Banken Hotelschliessfächer»

(because of excessive demand  [running out of supply] swiss banks rent safety boxes in hotels)

 

http://bazonline.ch/ausland/europa/Wegen-abnormer-Anfragenflut-mieten-Sc...

Thu, 02/02/2012 - 08:52 | 2119409 masterinchancery
masterinchancery's picture

In the longer run, these interventions always fail at great cost.  But they benefit a relatively small group of exporters and traders for a while, the bill being paid by the general public, which is clueless.  Buying the Swiss Franc would therefore seem to be a very safe trade, with a lot of upside at some future point.

Thu, 02/02/2012 - 08:06 | 2119379 EconSammie
EconSammie's picture

Hi Bruce

I was reading an article with similar thoughts on Tuesday about the Swiss Franc and the Yen. However it was concerned that the driving force was currency flight from the Euro. It also has more fears about the Swiss National Bank and whether it has thought through what "unlimited intervention" may mean in practice.

If someone out there wants to move a large sum of money from the Euro to the Swiss Franc then they may find that central bank intervention gives them a chance to do that so that the current seeming stability is misleading. The best analogy here is a dam burst which looks untroubled until the moment it happens.

 

http://bit.ly/zw1Muz

Thu, 02/02/2012 - 07:58 | 2119370 Tic tock
Tic tock's picture

Yes, intervention, time to 'socialize the losses'.  ..in theory though, it might make sense to 'justify' the socialization in only those environments where the process has actually expanded the 'real' economy. 

Thu, 02/02/2012 - 07:52 | 2119365 ebworthen
ebworthen's picture

"Normally when you see Euro strength versus the dollar, you also see it in the EURCHF cross. Not this time around. It does make me go Hmmmm."

I would bet that a lot of money is already flooding into the Swiss Franc from Europe, and into Dollars.

And don't forget, the FED is allowing European banks to do almost unlimited currency swaps.

Thu, 02/02/2012 - 07:44 | 2119362 disabledvet
disabledvet's picture

"You can't loot the country...but you can loot its constituent parts."

Thu, 02/02/2012 - 07:39 | 2119360 falak pema
falak pema's picture

currency games are like wife swapping; you have no loyalty to skin and perfume, just to momentum and ephemeral gain in back to the wall thigh pumping. 

Piston Joe and Floozy Sue are old hands at it. But for the newbies of this world, I say stick to tennis, its more healthy. And a touch of silken skin in sweat perfumed angst at matchpoint is worth its weight of carry trade's immoderate tear jerking spreads. 

Thu, 02/02/2012 - 06:57 | 2119331 The Reich
The Reich's picture

Schizer? Actually it's Scheiße. But LOL, anyway.

Thu, 02/02/2012 - 09:43 | 2119496 Bruce Krasting
Bruce Krasting's picture

Yes, but I don't have the ß in my old computer.

Thu, 02/02/2012 - 07:37 | 2119355 disabledvet
disabledvet's picture

I've heard his nickname is "weiner." As in "weiner schizer." Is this true?

Thu, 02/02/2012 - 13:12 | 2120398 dearth vader
dearth vader's picture

"weiner schizer"? - You mean "Weiner Schnitzel", I suppose.

Thu, 02/02/2012 - 05:05 | 2119266 onebir
onebir's picture

"It’s worth noting that the Dollar got beat up for five big figures against the Euro the past week or so." Anyone know what was driving this? Greece's not exactly fixed... let alone Europe. Just short-covering?

(BTW - thanks Bruce for pointing out how tricky it would be for the SNB to defend its peg outside European hours, & how they could do it. Very enlightening!)

Thu, 02/02/2012 - 04:13 | 2119224 Tao 4 the Show
Tao 4 the Show's picture

Swiss bank disappears

Bruce,

You seem to have an interest in Swiss events. Have you written about Wegelin bank? The oldest Swiss bank just vaporized like MF customer funds. (Only the bank vaporized, customer funds were protected and transferred to a new entity.) Could it have something to do with their controversial 2009 commentary?

I'm surprised this has not been mentioned on ZH, although I may have just missed it.

Thu, 02/02/2012 - 09:58 | 2119537 Bruce Krasting
Bruce Krasting's picture

I am aware of the Weglin story. This is a chapter in the bigger story of the USA going after the Swiss Banks and the US accounts.

I have written about this off and on for the past three years. I think things are coming to a head now. A (sort of) resolution should be out in a month or two??

The Swiss banks will all fold. Give up the names and pay big fines. They must be furious at this point. It's Geithner who is pushing this, I believe. He's gone in 10 months.

I'm a Swiss citizen living in the US. There is no way I can open a bank account in Schweitz any longer. I can't even have a PO ac.

Does Switzerland have a navy? Possibly they could invade Puerto Rico in retaliation.

Thu, 02/02/2012 - 13:05 | 2120364 Kayman
Kayman's picture

Give up the names

Uhhh.... except for the U.S. politicians.

 

Thu, 02/02/2012 - 11:07 | 2119812 Gromit
Gromit's picture

I'll miss the Wegelin commentaries.

Thu, 02/02/2012 - 04:17 | 2119226 Ghordius
Ghordius's picture

+100 careful though with "vaporize", as you say the funds and clients were not robbed, just the bank had to cease to exist

Thu, 02/02/2012 - 05:03 | 2119269 onebir
onebir's picture

"customer funds were protected and transferred to a new entity"

Thu, 02/02/2012 - 04:15 | 2119219 Negro Primero
Negro Primero's picture

The Morning Adviser 2 February 2012

Targets: EURCHF 1m 1.20, 3m 1.20

 Trade figures are due for Switzerland on Thursday. The market is expecting a CHF2.5 bn surplus, a slight dip from last
     month’s CHF3.0 bn print. The data will be scrutinize for signs that a strong CHF is still squeezing exporters."

                                            ---------------------------

  Targets: USDJPY 1m 77, 3m 75


 Finance Minister Azumi said that the FOMC’s decision to signal a lower-for-longer policy rate has boosted the yen.
     He   said   he   is   “calmly   watching   the  market   now,   but   I   can't   overlook   any   acceleration   in   moves   by   short-term
     speculators".

BoJ Board member Yamaguchi said he doubts the recent yen rise will trigger an immediate policy reaction. Given his
     remit he was referring only to the possibility of further monetary easing from the BoJ, and was not remarking on the
     risk of FX intervention.

 On Wednesday we entered a trade recommendation to buy a 78.75-strike USDJPY one-touch, expiry March 7, 2012.
     We pay 20% for a potential net payout of 80%. Spot reference at trade entry is 76.15.

 With spot now moving lower towards the 2011 lows near 75.50 that prompted the October intervention, we suspect
     there   is   an   increasing   chance   of   a   repeat   performance.   Switzerland's   establishment   of   a   EURCHF   floor   may   have
     encouraged Japanese policymakers in this regard as it sets a precedent for wealthy nations with zero interest rates and
     large balance of payments surpluses using FX policy actively to influence monetary conditions."

It's from Ubs....so be careful out there!

Thu, 02/02/2012 - 02:26 | 2119140 chump666
chump666's picture

We got the Yen intervention siren kicking in.  76.30 handle breached, so Aug/Oct 2011.  

Gonna be pleasurable when this market liquidates.

So many will be caught long.  Eye bleeding.

Thu, 02/02/2012 - 02:16 | 2119131 bankruptcylawyer
bankruptcylawyer's picture

bruce what i love about your picture is that that sculpture was buried underwater for 25 or so years before it re-emerged . 

 

i suspect intentional symbolism. 

Thu, 02/02/2012 - 11:44 | 2119992 espirit
espirit's picture

Yep, fish trap.

Thu, 02/02/2012 - 02:06 | 2119121 falun bong
falun bong's picture

Fabulous earth art photo. I once hiked "illegally" to see Turrell's Crater in the desert. Had to climb barbed wire fences and make sure the cowboys didn't see us. It was worth it. Do you also like Andy Goldsworthy?

http://www.google.com.au/search?q=andy+goldsworthy&hl=en&client=firefox-...

 

 

Thu, 02/02/2012 - 10:08 | 2119553 Bruce Krasting
Bruce Krasting's picture

I do now. Great images. Thanks. I might use one.

Thu, 02/02/2012 - 01:47 | 2119099 barliman
barliman's picture

 

Japan is the last safe haven currency for a carry trade since the Swiss bailed out with their peg at 1.20. The only workable solution for BoJ is to set a peg. I'll double down on your 85.00 peg point. They aren't the Swiss, they can't pull off a 20% devaluation. This will make their problems at home worse but hell - when you have already had an earthquake that moved your whole country 29 feet further east and three nuclear containment vessels ruptured, it's not like you need to worry that anybody wants your hard assets!?!

From your mouth to their ancestors' ears, BK. They will peg if for no greater reason than being able to tell Timmy Geithner to go piss up a rope.

They have obviously lost all of their samurai and ninja skills because otherwise Ben Bernanke would know how long you remain concious after someone severs your head from your body.

barliman

Thu, 02/02/2012 - 07:09 | 2119335 Ghordius
Ghordius's picture

Trav7777 had a remark on this lately about the gold prices and the Yen/Yuan. Perhaps leading to a de facto peg through gold?

Thu, 02/02/2012 - 07:09 | 2119334 Ghordius
Ghordius's picture

GK, are you keeping your thoughts delberately opaque? While the current SNB floor is set on the EURCHF, I thought the big ones are the USDCHF and of course the immense EURUSD. I might be dense and sure no experienced FX trader, but I have the impression you don't get through all implications, leaving some "hints" only...

Thu, 02/02/2012 - 01:04 | 2119031 non_anon
Thu, 02/02/2012 - 06:55 | 2119330 bank guy in Brussels
bank guy in Brussels's picture

Great 80s music video there, 'Twilight Zone' (after the few seconds of Goog-YT ad commercial).

Golden Earring is a Dutch band, and that vid does capture a rather European feel of streets here.

Brussels in particular is said to have the 2nd largest gathering of international spies and operatives anywhere in the world, after New York City.

Though my friend the political refugee from the US, who is the expert on US judicial corruption with his journalism sites blocked from search results by the CIA's Google Inc., is still alive, protected by the house of the King of the Belgians, Albert II, though the Americans wanted to murder my friend several years ago.

My friend tells me this video reminds him of his life as an exile opponent of the US regime, with the US threats to kill him ... including CIA stooge women who have been contacting him. He has shown me some of the CIA agent e-mails. Those US agents are really idiots.

 

Thu, 02/02/2012 - 07:18 | 2119338 Ghordius
Ghordius's picture

"Those US agents are really idiots"

you have to make a difference - when it comes to all intelligence operatives of any nation - between the officers (who are usually quite smart) and their agents (who are whoever can be recruited/paid/forced to do the work)

it's very rare you can encounter the first type (it's against deployment/operational doctrine), so you might get a wrong impression from the expendable tools they use

Thu, 02/02/2012 - 00:32 | 2118965 SmoothCoolSmoke
SmoothCoolSmoke's picture

OK, my limit orders are in :

Buy USD/JPY @ 75.65 w/ a 10 pip stop.

Buy EUR/CHF @ 1.199 with 5 pip stop.

Both good for a month.

 

 

 

Thu, 02/02/2012 - 01:37 | 2119086 hyper-critical
hyper-critical's picture

Enjoy having your stops run by the big boys. They're just as ready for this scenario as you are, except they're aware of how these situations usually play out, and will pick you off leaving you to whine about how you got robbed.

If we break these levels, it will be by significantly more than 10 pips.

Thu, 02/02/2012 - 10:11 | 2119573 Bruce Krasting
Bruce Krasting's picture

I  agree. Stops won't work if things go haywire.

I think this is a "pros only" market. Small guys will get stepped on.

Thu, 02/02/2012 - 12:58 | 2120331 NotApplicable
NotApplicable's picture

I think the "pros" will get stepped on too. Well, at least all but the Chosen Ones.

Thu, 02/02/2012 - 07:59 | 2119371 gookempucky
gookempucky's picture

+1

Have to ride HC coattails- moves now are measured in 1/4-1/2 and full points--small pip moves are bait. The over run of small stops is like the poor midget attempting to buy a cabbage patch doll at walmart during black friday shop till you drop.

You become road kill. 

Thu, 02/02/2012 - 08:04 | 2119375 gookempucky
gookempucky's picture

Forgot to thank BK for all his great work---thumbs up.

Thu, 02/02/2012 - 00:25 | 2118949 Freddie
Freddie's picture

Poor Japan is a dead man walking.

Thu, 02/02/2012 - 01:26 | 2119074 non_anon
non_anon's picture

slit eye pie

Thu, 02/02/2012 - 00:19 | 2118938 piceridu
piceridu's picture

BK, you're a bad ass. Thanks for another terrific post.

Thu, 02/02/2012 - 00:03 | 2118899 JamesB
JamesB's picture

The crazy thing I can't understand about this market is that the Bank of Japan is doing QE in an even bigger way than the Fed did.  According to a chart presented by "Tyler Durden" a while back, BOJ reserves are an even bigger portion of Japanese GDP than US Fed Reserves (of US GDP).

And yet the Yen is gaining strength.  Does that mean the BOJ could monetize another 50% of GDP and they would only get to 90 Yen/Dol?

The answer must be some combination of demographics, savings rate and export machine.  But wow - Big QE == Too strong of a currency.  Almost inexplicable.

Thu, 02/02/2012 - 01:44 | 2119096 hyper-critical
hyper-critical's picture

Not inexplicable. I was dumbfounded by this until I posed the question to a senior fx trader at a major bank. His explanation was simple and seemed obvious after I heard it, and it makes complete sense.

An oft-overlooked key issue in exchange rate dynamics is depth of a country's bond markets. Liquidity is king, and there are structural reasons for currencies like the pound, yen, and dollar to have not collapsed by now. These are incredibly powerful dynamics...you need to respect them as a trader.

Having said that, at some point there will be a snap back to fundamentals, and it won't be orderly. Be patient, and try to play these moves in long-dated options if you can.

Thu, 02/02/2012 - 11:05 | 2119797 Gromit
Gromit's picture

Swissie also?

Wed, 02/01/2012 - 23:58 | 2118889 PicassoInActions
PicassoInActions's picture

Another thing i always get confused, many big japan companies are crying about strong Yen... but they are the majority who are buying the yen and pushing it stronger.

Yen always gets stronger in asia session and i see articles after articles from Japannes banks and big investment houses who buys yen. The very next day they are all crying how strong Yen is. wtf.... 

Wed, 02/01/2012 - 23:56 | 2118884 TheMerryPrankster
TheMerryPrankster's picture

Traders have a Yen for Swiss Francs, you can bet your bottom dollar on it.

I know its just leveraging one currency against another, but they're all fiat in the end. It's gotten so when I use a hundred dollar bill at a store, I'm amazed that they still take them.

Perhaps I'm getting old, but they are starting to look like colored paper. Just colored paper.

1st Superbowl tickets were 12.00 usd, this year's price 1,200.00 usd, thank you Federal Reserve for our wonderful low inflation.

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