Notes From Underground: The Darkness of Foreign Exchange

There were two central bank meetings in the past two days: The Bank of Canada and the European Central Bank. The BOC stayed its current course with no change in policy. Several analysts were looking for more dovish action because of the appreciation of the Canadian dollar but the BOC was wise in noting that a “broad-based decline” in the U.S. exchange rate has contributed to a “further appreciation of the Canadian dollar.” As a result, the BOC has ZERO concerns about its currency appreciating as long as it is BROAD-BASED.

On Thursday, the ECB was dovish as it increased the PEPP program by 500 billion euros while also extending the duration of its emergency purchasing program. Several analysts opined that the central bank was more hawkish than expected, which sent EUROPEAN SOVEREIGN DEBT yields higher for about an hour but German, French and Italian bonds all staged a late market rally. Even as the doves regained control the EURO CURRENCY continued its recent appreciation, which is more of a statement about the U.S. than mere interest rate differentials.

During her press conference, the Frankfurt OWL twice noted that the ECB will MONITOR the continued appreciation of the EURO. It is difficult to generate inflation while your currency is appreciating, which is why it’s a concern for the ECB’s ONE-DIMENSIONAL mandate. But the bank has to be VERY CAREFUL about currency intervention for the U.S. Treasury will not sit idly by if it believes the ECB is trying to hold its currency down in an effort to aid its exports. Christine Lagarde was very, very careful in answering CURRENCY questions and even reiterated that they do not TARGET exchange rates.

But when is interest rate policy deemed to be an effort to limit currency appreciation? On Thursday there was a story from Reuters about the U.S. Treasury labeling the Swiss National Bank a CURRENCY MANIPULATOR, which would involve placing sanctions upon the SWISS.

The franc is at very high levels and continues to appreciate in the face of massive SNB interventions. However, IF THE SNB IS LABELED A CURRENCY MANIPULATOR WILL IT HAVE AN OVERALL DOWNWARD EFFECT ON THE DOLLAR. Watch the 0.8803 CHF cash level on a weekly closing basis to get a sense of Swiss concerns about falling afoul of U.S. sanctions. That’s overall bearish the dollar and Lagarde will be monitoring this possibility.

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24 Responses to “Notes From Underground: The Darkness of Foreign Exchange”

  1. David Richards Says:

    As virtually the entire West and developed world has ZIRP or marginal NIRP (clearly they’re all NIRP in real terms as a matter of policy), interest rate differentials aren’t very meaningful anymore.

    IMO they’ve been superseded by the relative size of CB balance sheets, specifically changes thereto – because in markets, it’s usually the rate of change rather than absolute numbers that matter more.

  2. David Richards Says:

    Seems to me that the US is now a major currency manipulator, so the UST ought to place USD along with CHF at the top of its list of currency manipulators. Lol.

  3. David Richards Says:

    Canada’s Chrystia Freeland just tweeted that Canada is considering negative interest rates. Earth-shattering news, I know (lol). She’s the new Cdn Finance Minister who’s apparently committed to the WEF Agenda as is CAD PM Trudo, which is why he replaced the previous Finance Minster Morneau who objected to much higher deficit spending and MMT principles that both Canada and US have embraced.

    Canada and US are a monetary trainwreck, from where I sit in Asia where virtually no country ex-Japan has ZIRP, NIRP, MMT, QE, bailouts, PPP, helicopter money, gov’t takeover of the bond & mortgage markets, dependence on repeated stimulus “paid for” by monetized debt issuance, etc.

    While interest rates in Asia ex-Japan are at or near historic lows in most cases, they’re mostly not zero even in real terms and they enjoy large reserves in contrast to the 1990s Asian Financial crisis from which they apparently learned some lessons. IMO their economies are better run and better positioned for the future.

    That’s another reason to be overweight select EM (eg. long most of eastern Asia but not S.Africa nor parts of Latam for eg) on pullbacks as they’ve already been bid lately (dollar-based portfolios may better wait for a temporary bounce in USD which is currently oversold).

    Plus now there’s the newly ratified RCEP taking effect in January, the largest free trade agreement in history, binding together most of the Far East for the first time ever, covering one-third of the world’s population and global GDP, which IMO deserves the 2020 Award for Most Underreported story, with big ramifications for the future.

    • yraharris Says:

      Dave–great post and will you link the freeland tweet

      • David Richards Says:

        Must confess I don’t follow Freeland as I’m no fan. Instead I should credit that observation to Jared at the Daily Dirtnap who on Monday Dec 7 wrote, “I saw Chrystia Freeland on Twitter hinting at negative rates in Canada, in a video, and yet CAD continues to go higher [against USD]”. I presume rates are the purview of BOC, not Finance, but in Canada they’ve long worked together, like Mark Carney and Jim Flaherty regularly did a decade ago.

    • The Bigman Says:

      Dave Thanks much for the Asian view- you are one of the reasons this blog is so valuable and unique. I have recently invested in Asia but not for the great reasons you list. I invested because Asia is minimally impacted by Covid compared to USA and Europe. Death rates are astonishingly low: Viet Nam 14 per million; Malaysia 12; Taiwan 0.3(that’s right less than 1 per million); Singapore 5; China 3;
      South Korea 11. Compare to USA of 900/million. As covid is the largest drag on world economies I expect those countries who control it best will recover the fastest and have an advantage going forward. FWIW

      • David Richards Says:

        Hi Bigman, thanks for the kind words. Not sure how accurate those reported numbers are but Thailand and Vietnam as well as Taiwan all report less than 1 Covid death per million people too. Japan and HK are the higher ones in the region at 15-19 deaths per million. And yes, the recovery in east Asia has been swiftest so far. China will be the only large economy in the world to achieve overall growth for 2020 as things there have been largely back to normal for some months, so much so that vaccine trails were forced to end there months ago due to insufficient new Covid cases for testing.

        OTOH some of those East Asian countries have as an outsized tourism sector that’s decimated and could be slow to recover, especially because those countries have the world’s strictest border closures to foreigners including tourists.

        My continuing bullish case for EM Asia, subject to a potential pullback as valuations & currencies are already overbought, is based on relatively strong domestic & regional economic activity combined with easy financial conditions globally ex-China, the weak dollar and the easy year-over-year comparisons for 1H21.

  4. BT Says:

    Yra- You are right more times than me but I think the dollar is bottoming here as people are starting to realize that this “reflation” trade and TINA is a pump/dump. The short dollar/short long bond is too crowded a trade to boot. The US 30yr yields are not rising. Based on my small sample size people (with good credit) I know tell me its impossible to get small business loans or credit right now. That is not consistent with inflation coming soon if that is true at large and lending standards are that strict.

    • yraharris Says:

      BT—you may see something in the technicals and I certainly am aware of the 1.25 level in the euro and of course.8803 in the swiss but I think if the FED goes to YCC the dollar will blow through support levels as that will be the step beyond for a reserve currency.Also what Dave Richards sees in Asia I agree with and the NIKKEI gaining even as the YEN appreciates is a tearing downof some long held correlations—to this I pay close attention.

      • BT Says:

        Yra- thanks for the reply. Been a longtime lurker of your content and you are one of the best around so appreciate your insights.

        Definitely interesting times for the USD. If the fed does do YCC, yield on 10/30yr treasuries should drop significantly as all the steepener bets would capitulate? In this scenario, your theory sees dropping yields, a weaker dollar, and rising equity prices? Or does YCC spook the markets lead to equity retracement, and a flight to safety into USD at least in the short-term.

    • The Bigman Says:

      Concur on credit tightness My daughter who has a senior position in legal department at a well known tech company and an 800 credit score just got turned down for a LL Bean credit card. Similarly her husband is having difficulty getting a credit card for his new psychiatry practice despite having also an 800 score. Crazy

      • David Richards Says:

        Wow, what a great anecdote. So then how will the average joe ever get a mortgage? Who wants to lend to him at such low interest rates (negative real rates) in an environment of falling currencies (all of them together) and rising inflation expectations. Answer: only a fool or the government (same thing).

  5. Michael Temple Says:


    A few thoughts

    Central bank QE efforts are increasingly “pushing on a string” as the bang for the buck lessens with each growing boost.

    BOJ leads the pack with the highest percentage ownership of its bond market at roughly 43%

    ECB is next at 30ish%

    Fed, despite its 2020 ramp up, is still in the 20s.

    Without a doubt, we are seeing more and more VOL drain OUT of bonds as the free float gets reduced. And where has that VOL gone?

    Up the chimney without a trace?

    No, just look to the FX markets where as you point out, imbalances are beginning to spill over with EUR and CHF and JPY all making big moves.

    Expect USD VOL to continue to pick up as the Fed has a lot of “catch up” to do to get to the “manipulated” levels of the BOJ and ECB.

    Perhaps a hint of YCC at the December Fed meeting? After all, Mr McConnell et al seem determined to let Mr Powell take on all the responsibility as they shun fiscal stimulus for now.

    Of course, if the Dems take Georgia, and therefore the Senate, expect a tsunami of deficit spending that will “enable” the Fed to join in the Reindeer Games of the ECB and BOJ.

    Plenty of room for Fed to expand its percentage holdings of USTs

    • David Richards Says:

      Mike, good points again. Two more considerations to add to those.

      One, the global reserve status of USD and the large twin deficits of the US put the Fed in a different spot than the BOJ and ECB when comparing them, perhaps affecting the “room” the Fed has on its B/S at least with respect to the impact on the value of the dollar, ie., BOJ has been able to “get away with” a relatively larger B/S than the Fed probably can without destroying the dollar and its exorbitant privilege – perhaps an issue of national security.

      Two, I think the level of CB holdings is secondary to the rate of change in such holdings in terms of the impact on the trading value of the respective currency.

  6. Bob Zimmerman Says:


    When do the Markets react to the Treasury taking away the backstop for the Corporate debt?

    • yraharris Says:

      Bob–when will that be ?I just don’t see it yet and actually look to FED[soma] buying much more muni and state debt

      • Bob Zimmerman Says:

        Mnuchin is taking back the unused funds from the TALF, Primary & Secondary Market Corporate credit facilities, Municipal Liquid Facility & the Main St. Lending Program. They end December 31st.

    • yraharris Says:

      Bob–yes i know but can the FED buy up muni debt in the secondary market and declare a moratorium on interest payments under 13[3]?I have been pondering this since the Congress and WH deadlocked over covid stimulus 2

      • Bob Zimmerman Says:

        Thanks Yra!

        I’m looking for my notes on that class I took at Berkeley University from Dr. Timothy Leary.

      • yraharris Says:

        Bob–I thought he was dead but evidently on the outside looking in at the Fed balance sheet—a little orange sunshine in your day

  7. Fred Geschwill Says:

    I don’t mean to be ignorant, but I am trying to understand. As to the USD/CHF. I have looked it up and it hasn’t traded below .8803 since jan 2015. The question I have is CHF levels in regards to other currencies it seems to be moving to a higher level vs. JPY but not crazy yet. EUR it seems to be middle of the road. How do this effect the gnomes out look vs positioning in 2015 vs USD? Thankyou for any clarification. These are very complicated issues that everyone here seems to have a decent handle on. (less me)

    • yra harris Says:

      Fred –good questions and love that you ask because if you don’t none of us learn.Yes ,the CHF is moving to higher levels as you point out via the CROSSES—cad/chf,aud/chf Chf/yen eur/chf range bound but I believe this is the largest influence for the SNB.The .8803 is critical on its relationship to the first week close after the massive market action by the SNB—believe me the SNB is cognizant of this despite all of its efforts but if the U.S. labels the SNB a currency manipulator will the market rush to BUY CHF causing the SNB ever more problems in an effort to prevent the ise of the CHF versus the Euro?If so we will be watching the overall effect on currency markets .The issue of haveness is something to continue to analyze because in my mind a haven has a responsibility to its CHAMPIONS to act as a qualified fiduciary—-does the current policies of the U.S. fulfill that mandate?

  8. Fred Geschwill Says:

    Thankyou Yra, I will continue to watch read and learn. I almost get the feeling the currency/financial markets are preparing for a war. Each country is moving the chess pieces slowly and deliberately watching for who will blink first… I just hope someone watches out for the every day citizen. Again, thank you

  9. Fred Geschwill Says:

    Clarification, I mean a financial war not a shooting war.

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