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.
Tags: BOE, BOJ, Bond, Bunds, Dollar, ECB, Euro, euro/swiss, Gold, haven, Italy Italian BTP bond futures, SNB, Spain, swissie, Trichet, Yen, zero
August 4, 2011 at 8:08 am |
Do you think Swiss and Japanese moves could lead to a spiral of competitive devaluations?
August 4, 2011 at 1:11 pm |
Great blog yra…as far as the equity markets….is there any catalyst or government intervention that your looking for to find some bids in equities? In the us and eu? Your call to watch and trade the 2/10 spread was spot on these past few months!
August 4, 2011 at 8:37 pm |
Jason–we are testing the lows of the 2/10 made last year just prior to Jackson Hole.If the curev were to flatten through that support I will become very nervous about the entire global economy.In the short term the question is going to be are stocks going to be a safe haven.I know that is a strange question and answer but again where are you going to go with your money especially once the G20 make a concerted stand to flood the global system with liquidity–Japan and Switzerland are getting the ball roling with their huge liquidity adds–GOLD corrected today as everything of value was being cast aside as FEAR took over—let us see where we go when some sanity returns to markets–right now it is the fog of war
August 6, 2011 at 9:43 pm |
Yra writes, “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.”
Look everybody! Money!
Anything that does not hold its value cannot, and is not, money. In fact, it appears we in America prefer little pieces of paper with numbers stamped on them. We call it money, but it ain’t. According to even Mr. Bernanke, money, properly defined, must exhibit three characteristics: it must be a medium of exchange, a unit of account, and a store of value. [Andrew Abel and Ben Bernanke, Macroeconomics, 3rd Edition (New York, Addison-Wesley, 1998), pp. 219–20.] The US paper dollar certainly meets the first two requirements but it fails miserably on the last.
Gold holds an indispensable characteristic of anything that wishes to lay claim to the title of “money” – it is impossible to counterfeit; hence the supply of it cannot suffer sudden, massive waves of expansion followed by sudden, massive scarcity; this protects the economic body from the huge monetary disturbances we all know and love in our Age of Paper.
The very fact you can’t counterfeit gold is what makes it so disdained in the modern age. Such a monetary system, everyone would immediately argue, is not FLEXIBLE (i.e., it “can’t be manufactured on a printing press”). Sadly, that inflexibility is the very reason you institute a gold standard in the first place.
Of course, going back on the classic gold standard is impossible at this time. The use of gold as our medium of exchange would preclude fun, important-looking, economically ignorant and ultimately useless actions such as currency interventions, bank bailouts, debt monetizations and centrally planning the level of interest rates.
And with America concerned above all with jobs, a gold standard would leave thousands of central bank employees without gainful employment. Where would they find a job?
GOSPLAN is long gone.