Notes From Underground

All quick hitters tonight:

***Last night the RBA proved consensus wrong and moved to hold rates steady at 4.25% rather than cutting the OVERNIGHT RATE 25 basis points. Readers of NOTES FROM UNDERGROUND are well aware that I think very highly of RBA GOVERNOR STEVENS for the bank’s comments on the global economy are pithy and prescient. The RBA‘s release was loaded with opinion about the EUROPEAN efforts to stem the sovereign debt crisis and noted that the LTRO alleviated the “acute financial pressures” on banks. The RBA did note that “should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy.”

It appears as if Governor Stevens is very comfortable waiting for the second round of the ECB‘s LTRO and waiting to see its success. There are worries about China’s growth but nothing so pressing that the Aussies believed that cutting rates was appropriate. The most significant element in the statement was a reiteration that European growth is the demon de jour so everybody has Europe to point to as the reason for underperformance. Every CEO that has failed to meet guidance has pointed at Europe. And even FED Chairman Bernanke can play the EUROPE CARD as the reason the FED will keep rates low even as U.S. data improves. All excuses will be relegated to WHAT A GREEK EARNS.

***Thomas Jordan, interim head of the Swiss National Bank (SNB), was talking today about the importance of keeping the EURO/CHF above the 1.20 PEG. Central banks have to continue to learn that markets will always challenge the proverbial “LINE IN THE SAND.” The Swiss have been on the defensive over the last few weeks as concerns about Greece and Portugal have put renewed upward pressure on the FRANC versus the EURO. Since mid-December the EUR/CHF has declined from the high 124s down to 120.50. The 120 PEG has not been breached but from the market action it is only a matter of time. Today, the SNB reported out that the SWISS CURRENCY RESERVES fell to 227.21 BILLION FRANCS in January from a level of 254.25 BILLION FRANCS AT THE END OF DECEMBER.

The SNB does not DISCLOSE how much it spends defending the PEG so we are left conjecturing why reserves dropped. It could be that the SNB bought in some FRANCS and sold other currencies in the effort to reload its ammo for a future need to defend the cross. It could also mean that money was leaving Switzerland for other venues not fraught with a government intent on weakening its currency. Whatever the reason, we know one thing: THE MARKET IS GOING TO TEST THE SNB.

How THOMAS JORDAN prefers to respond will be the question. The SWISS CAN GO TO NEGATIVE INTEREST RATES as present 3-month Swiss money is yielding 5 basis points after having gone negative for a while last August and September. The SNB can also place a time restriction on inflows of money into Switzerland and forcing it to stay for 3 years or some such duration, or pay a sizable penalty for early withdrawal. It is time to be alert for some aggressive action from the Swiss.

***One further effect of the EUROPEAN CRISIS was that the IMF warned China that its growth targets would be heavily impacted by the recession in Europe. IMF economists warned that Chinese growth could be halved if the EUROPEAN RECESSION deepens. The warning came along with advice for Chinese to provide stimulus for its domestic economy and most probably Director Lagarde let the CHINESE KNOW THAT ANY DONATION TO IMF FUNDING WOULD BE GREATLY APPRECIATED. The colonial instincts of the WEST are never laid to rest. The lessons of the 1950s seem never to have really been learned. ALMS FOR THE POOR.