Yesterday the Swiss National Bank surprised the markets by lowering overnight lending rates to basically ZERO–the nearby 90-Day EUROSWISS contract (Sept. 2011) traded for 2 basis points–or, 0.9998 for those keeping score. The SNB also pledged to increase sight deposits from 30 BILLION SWISS to 80 BILLION SWISS, a very aggressive liquidity add, all in an attempt to stem the rise in the FRANC. By the end of the trading day the SWISSIE recouped most of its overnight losses in an act of defiance.
Traders have to marvel at the brazenness of markets, as investors will test the SNB to find out what other tools it has to prevent a further increase in the FRANC‘s value. The market says to the SNB: “Fifty basis point cut and a 50 BILLION liquidity add is that all you have? I am not afraid.” The market will push until the SWISS place a surcharge on the placing of foreign funds in Swiss banks resulting in a negative yield.
The Hungarian bank asked for some relief on the large amount of Swiss-based loans taken out against Hungarian FORINT accounts. When the Swiss had very low interest rates in the earlier part of the decade, many Eastern European borrowed in SWISS to take advantage of the lower rates. These loans are placing a burden on the Eastern European borrowers who have to pay the loans back at a very appreciated rate. Between loans to Eastern Europe and a Swiss economy heavily weighted towards exports, the steep rise in the SWISS FRANC is problematic.
Last night, it appears that the BOJ has joined the intervention game as the DOLLAR spiked higher against the YEN when the Japanese began buying DOLLARS. At this time, the quantity is unknown but the IMM YEN FUTURES HAVE DROPPED OVER 200 POINTS. Of more than passing interest is that the GOLD has held tonight as the liquidity adds are seen to be a positive for the only HAVEN that can’t be manufactured on a printing press.
This morning we will hear from the Bank of England on its interest rate intentions (6:00 a.m. CST). There in no chnage expected in the BOE‘s policy as rates WILL BE held at 0.50% and the QE purchases will remain at 200 BILLION POUNDS. The British economy is slowing but that has been expected because of austerity budget enacted by the newly elected governement in 2010. The POUND has remained fairly weak against the EURO, its largest trading partner, so there is little incentive to change anything during this time of market uncertainty.
Forty-five minutes later, the ECB announces its rates decision and the consensus is for no change. Mr.Trichet would look like an absolute fool if the BANK cut rates after raising rates at the July meeting, another major policy error. The financial markets will be more attuned to the Trichet press conference at 7:30 a.m., as it waits to hear of any plans by the ECB to increase its funding for the purchase of secondary sovereign issues, SPAIN and ITALY.
As always, the market is searching out how far the Europeans will go to protect the weakest links in the EU. If Trichet announces an aggressive plan of support, watch for a rally in the EURO. More importantly, pay close attention to the ITALIAN BTP BOND FUTURES VERSUS THE BUNDS. It will tell you what the BOND traders think of the ECB‘s intentions.
Trichet has only three months left at the helm of the ECB, he will do all he can to keep the DEBT CRISIS on simmer until Mario Draghi becomes president. There is a great deal to digest and then of course Friday is the employment data … just when you thought it was getting easier.