Fed’s statement of intent

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It was only a week ago when markets were viewing the US Federal Reserve decision later today as the main policy event of the week, but last week’s comments from the ECB President changed that. 

Still, markets will still keep a close eye on the Fed’s statement following on from its two-day meeting.  The prospect of further quantitative easing remains strong, given the ongoing fragility of the economy and the Fed’s continued focus on the weakness of the labour market. Markets see a relatively low probability of this being sanctioned today.

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The single currency continues to wait patiently for the ECB meeting tomorrow, given the build-up of expectations for expanded measure on bond-buying. If the ECB delivers, then this should be positive for the single currency given the increased negative correlation between peripheral bond yields and EUR/USD.

Commentary

Is the SNB heading down-under? In comparison to the usual slumber, there were some ‘big’ moves on EUR/CHF yesterday, the cross rising up to 1.2020 during the morning session, before returning to its comfort zone a shade above the 1.20 level (which is the level the Swiss National Bank has pledged to defend). The data released by the SNB yesterday showed there was a pronounced jump in the proportion of FX reserves held in euros, from just under 51% in Q1 to 60% in Q2. The SNB had been doing a fairly decent job of ensuring that its interventions did not push up euro holdings to a disproportionately large proportion of its reserves, partly by being active in the FX swaps market (SNB data show such activity jumping substantially in the second quarter). This increase takes the proportion of reserves in euros to the highest level for two years. Despite the rise in euro currency holdings, there was also an increase in allocations to ‘other’ currencies, which for the SNB means AUD, SEK, DKK, SGD and KRW. These increased by more than 50%, modestly outpacing the rise in overall reserve assets. Globally, for those central banks that report breakdowns, the proportion of reserves allocated to ‘non-major’ currencies has more than doubled to 5.2%. There were reports this week from Australia that the SNB has become more active in buying the Aussie (Bloomberg, citing Australian Financial Review). This can’t be confirmed in the latest SNB data, but it would not be surprising and adds to the factors that have been supporting the Aussie in recent times.

China data remaining soft. More than usual, there is a strong focus on the state of the Chinese economy, with the latest purchasing manager’s report (PMI) suggesting that it remains fragile. The manufacturing PMI fell marginally from 50.2 to 50.1 (above 50 represents expansion), whilst a similar series by HSBC rose modestly from 48.2 to 49.3. There were however, positive, although unsurprising, messages from the Politburo underlining that maintenance of stable growth remains the top priority of the administration. There are growing expectations that we could see further policy measures, with premier Wen pledging to use different policy tools to ensure stable growth in money supply and bank lending, according to Bloomberg.

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