Swissie still far from the madding crowd

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We’ve seen exceptional volatility this week. The Swiss franc fell over 5% vs. the euro this week, the biggest move since the launch of the single currency.  Despite this, the Swissie is still up vs. the euro on the week. In equities, we’ve seen 500+ moves in the Dow for the past few days, something not seen in the history of the index.

It’s not only about news, it’s about diminished liquidity during the summer months which is causing price swings way beyond the norm.  Four European countries have introduced bans on equity short-selling.  Overall, in this environment it pays not to over analyse the extent of the price moves we are seeing.

Guest post by FxPro

Commentary

French GDP disappoints.  The data this morning has showed the French economy grinding to a halt in the second quarter. After the 0.9% QoQ gain in the first quarter, expectations were for a more modest 0.3% gain, so the flat outturn will not fit well with the current debate we are seeing around France and its ability to retain its triple-A credit rating.

 

Making a Swiss exit. The Swissie has continued to head lower yesterday and as with many of the moves we are seeing right now, a fair deal of the move is probably down to a lack of liquidity during the summer months. From nearly touching parity late Tuesday, EUR/CHF is now near the 1.08 level, which is actually only backing up to early Monday’s levels. This Swiss franc has powered ahead in recent weeks and understandably so, given the widespread concerns over sovereign debt, something which the Swissie is in no way subject to. After yesterday’s second action from the Swiss authorities in the space of a week (further expanding sight deposits and introducing CHF currency swaps), SNB Deputy President Jordan on Wednesday night suggested the possibility of pegging the Swiss franc to the euro. This is not to say it is something that is being contemplated, but nevertheless, when combined with the fact that liquidity injections could be increased further, it was sufficient to scare Swiss franc longs. There’s also the point that those who’ve been on the right side of the rally are likely having margin calls stacking up elsewhere given how markets are trading. In the wider picture, the factors that have pushed the franc higher are likely to remain in place. For the moment though, these are markets driven primarily by low liquidity, combined with fear often driven by rumour. Furthermore, the SNB remains very reluctant to throw good money after bad via further intervention (given the balance sheet damage over the past 18 months). As with many of the moves we’ve seen elsewhere, it pays not to read too much into the extent of today’s move on the Swissie.

 

The confusion in ECB policy. Yesterday the euro money market received 6-month money from the ECB, adding an additional EUR 50bln of liquidity into the market. Whilst this should aid banks, the market took fright at the jump higher in banks overnight borrowing from the ECB (just over EUR 4bln), reaching the highest level seen since late February. It will be worth watching what happens to money market rates in the coming days in response to this, as this is where ECB policy is ultimately being set right now. Even though the ECB has increased interest rates twice so far this year, overnight interest rates (which are what central banks try to influence primarily) are currently 30bp above the average that was prevailing in March and just before the first of the two 25bp increases in the minimum bid rate at the regular money auctions.  However, if we look at 3-month swap rates, with overnight rates as the floating leg, these are trading some 30bp below the level that was prevailing ahead of the April increase in interest rates. The reason is that excess liquidity in the eurozone money market (money deposited at the ECB over and above what banks are required to do) earlier this week was around 160% higher than was the case ahead of the first tightening. This excess of funds is pushing down overnight rates and further down the interest rate curve. The exception is Libor rates, given the increased tensions that have emerged in the interbank lending market.  So in effect, as we’ve pointed out before, the ECB is giving with one hand and taking away with the other. As such, despite all of Trichet’s pronouncements of last week, it’s difficult to say what the current ECB policy stance is; whether we are still in a tightening cycle or whether this is an easing of policy by stealth. The ECB is always keen to differentiate between monetary policy and liquidity provision, but the big liquidity overhang and downward pressure on money market rates show we have moved beyond this ideological distinction. The result is policy confusion, something that’s not going to be supportive of the single currency.

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