The SNB’s actions and threat at pegging EURCHF for a time and other
unknown potential options are finally bearing fruit as EURCHF soared in
today’s session. Is this the beginning of a turnaround process for the
franc?
Australia’s employment report
There wasn’t anything to like in Australia’s employment report, as the payrolls registered a miniscule decline rather than a modest hoped for gain (and the previous month’s figures were revised down more than 5k. To boot, the internals of the numbers were ugly, with -22k in full time losses vs. +22k in part time gains in July. The unemployment rate ticked up 0.2% to 5.1%, the first time it has risen since last October. (Remember that during the global financial crisis, the unemployment rate topped out at 5.8%.). This saw forward expectations for RBA policy drooping to a new low of -145 bps.
French banks
European banks are in the spotlight after massive declines in equity prices hit the sector in this last run down in the market, with a number of French banks getting the worst of the drubbing, as speculation swirls of a potential bank failure and whether this could trigger a Lehmanesque outcome. France’s SocGen is in particular focus, as its equity price has been pared in half since late July and its CDS prices have rocketed 100% in that same time frame. A Reuters story this morning discussed an Asian bank cutting its credit lines to French lenders due to the extent of the latter’s holdings of European sovereign debt. French CDS prices are now more than twice what they were in late June. Meanwhile, another Reuters article discusses the worrying direction for Italian economic growth stemming from the planned austerity measures that were rammed through recently.
A EURCHF peg?
As the pressure on the CHF to strengthen remains very much on, as long as the Euro Zone sovereign/banking sector worries continue to worsen, the SNB continues to grasp around for measures to counter this development. Flooding the system with more liquidity and threats to intervene in the currency via forward swaps (to create negative carry for CHF buyers) have been two threatened approaches, and now we have the idea of a “temporary EURCHF peg” to chew on, after the SNB’s Jordan suggested it was a possibility. But where would it decide to place such a peg? At 1.20? 1.30? And what are the mechanics of doing so? I don’t have the answers, but this finally seems to have gotten the attention of the market, as CHF weakened sharply in today’s market. The option market skew (EURCHF puts far more expensive relative to calls to a degree even worse than during the global financial crisis) and other indicators suggest that this move can’t continue much longer. Zero Hedge yesterday pulled out the Big Mac indicator, which shows a Big Mac in Zurich costs over $17. Something’s got to give soon on this front.
Chart: EURCHF
The EURCHF chart today showing steep signs of recovery after the SNB measures and threats at further action seem to finally be gaining some traction. It is interesting to note that this tremendous bounce comes despite ongoing very negative worry signals on the Eurozone sovereign debt/banking sector. The violence of the bounce is cause for pause for those who believe the franc can strengthen indefinitely.
Australia’s employment report
There wasn’t anything to like in Australia’s employment report, as the payrolls registered a miniscule decline rather than a modest hoped for gain (and the previous month’s figures were revised down more than 5k. To boot, the internals of the numbers were ugly, with -22k in full time losses vs. +22k in part time gains in July. The unemployment rate ticked up 0.2% to 5.1%, the first time it has risen since last October. (Remember that during the global financial crisis, the unemployment rate topped out at 5.8%.). This saw forward expectations for RBA policy drooping to a new low of -145 bps.
French banks
European banks are in the spotlight after massive declines in equity prices hit the sector in this last run down in the market, with a number of French banks getting the worst of the drubbing, as speculation swirls of a potential bank failure and whether this could trigger a Lehmanesque outcome. France’s SocGen is in particular focus, as its equity price has been pared in half since late July and its CDS prices have rocketed 100% in that same time frame. A Reuters story this morning discussed an Asian bank cutting its credit lines to French lenders due to the extent of the latter’s holdings of European sovereign debt. French CDS prices are now more than twice what they were in late June. Meanwhile, another Reuters article discusses the worrying direction for Italian economic growth stemming from the planned austerity measures that were rammed through recently.
A EURCHF peg?
As the pressure on the CHF to strengthen remains very much on, as long as the Euro Zone sovereign/banking sector worries continue to worsen, the SNB continues to grasp around for measures to counter this development. Flooding the system with more liquidity and threats to intervene in the currency via forward swaps (to create negative carry for CHF buyers) have been two threatened approaches, and now we have the idea of a “temporary EURCHF peg” to chew on, after the SNB’s Jordan suggested it was a possibility. But where would it decide to place such a peg? At 1.20? 1.30? And what are the mechanics of doing so? I don’t have the answers, but this finally seems to have gotten the attention of the market, as CHF weakened sharply in today’s market. The option market skew (EURCHF puts far more expensive relative to calls to a degree even worse than during the global financial crisis) and other indicators suggest that this move can’t continue much longer. Zero Hedge yesterday pulled out the Big Mac indicator, which shows a Big Mac in Zurich costs over $17. Something’s got to give soon on this front.
Chart: EURCHF
The EURCHF chart today showing steep signs of recovery after the SNB measures and threats at further action seem to finally be gaining some traction. It is interesting to note that this tremendous bounce comes despite ongoing very negative worry signals on the Eurozone sovereign debt/banking sector. The violence of the bounce is cause for pause for those who believe the franc can strengthen indefinitely.
US Data
The weekly jobless claims picture seems to be showing relatively consistent improvement of late, a hopeful sign for confidence and the economy, though this is the low seasonal period for firings and we have seen some rather high profile decisions from large companies to lay off workers, so let’s wait for another 5 or 6 readings to see if the trend is continuing. The US June Trade Balance data was awful, registering the worst trade deficit since late 2008 and the ex-petroleum number went the wrong way as well, despite weak US consumption growth. What will ever right the global imbalances? China seems to be trying to do its part by allowing the yuan to strengthen very sharply over the last couple of days, despite a relatively strong USD. That may have more to do with the renewed uptick in Chinese inflation, however. There is an interesting ongoing debate in China on what to do about the yuan and USD treasury purchases.
Looking ahead
The MoF jawboning in Japan on the JPY level continues, but the market perhaps wonders at the political resolve for strong action as Kan will likely step down soon. Again – we note the rise in yields at the long end of the JGB curve with considerable interest. Perhaps eventual worries of sovereign debt default are what eventually “saves Japan” from its strengthening currency?
GBP has been escaping much attention as EURGBP tends to get beaten back when Euro fears are at their worst, but the deteriorating trade picture despite sterling’s overall very weak levels versus other major currencies and particularly the distress from the London riots have us wondering why sterling isn’t trading lower than it has recently against the USD and elsewhere. Yes, the Fed’s intention to keep the funds rate at nil into mid 2013 did see a large one-off droop at the front-end of the yield curve, but at some point, GBP’s tendency to trade as a safe haven currency may eventually find itself challenged.
Watch out for ongoing headline risk and the violent swings this market features at every turn. EU officialdom is going to need to roll out the heavy artillery here to get ahead of the disintegration threat at worst and a Lehmanesque meltdown at best if some kind of official and very large scale action is not taken soon.
Economic Data Highlights
The weekly jobless claims picture seems to be showing relatively consistent improvement of late, a hopeful sign for confidence and the economy, though this is the low seasonal period for firings and we have seen some rather high profile decisions from large companies to lay off workers, so let’s wait for another 5 or 6 readings to see if the trend is continuing. The US June Trade Balance data was awful, registering the worst trade deficit since late 2008 and the ex-petroleum number went the wrong way as well, despite weak US consumption growth. What will ever right the global imbalances? China seems to be trying to do its part by allowing the yuan to strengthen very sharply over the last couple of days, despite a relatively strong USD. That may have more to do with the renewed uptick in Chinese inflation, however. There is an interesting ongoing debate in China on what to do about the yuan and USD treasury purchases.
Looking ahead
The MoF jawboning in Japan on the JPY level continues, but the market perhaps wonders at the political resolve for strong action as Kan will likely step down soon. Again – we note the rise in yields at the long end of the JGB curve with considerable interest. Perhaps eventual worries of sovereign debt default are what eventually “saves Japan” from its strengthening currency?
GBP has been escaping much attention as EURGBP tends to get beaten back when Euro fears are at their worst, but the deteriorating trade picture despite sterling’s overall very weak levels versus other major currencies and particularly the distress from the London riots have us wondering why sterling isn’t trading lower than it has recently against the USD and elsewhere. Yes, the Fed’s intention to keep the funds rate at nil into mid 2013 did see a large one-off droop at the front-end of the yield curve, but at some point, GBP’s tendency to trade as a safe haven currency may eventually find itself challenged.
Watch out for ongoing headline risk and the violent swings this market features at every turn. EU officialdom is going to need to roll out the heavy artillery here to get ahead of the disintegration threat at worst and a Lehmanesque meltdown at best if some kind of official and very large scale action is not taken soon.
Economic Data Highlights
- New Zealand Jul. REINZ Housing Price Index fell -0.6% MoM vs. +1.3% in Jun.
- New Zealand Jul. REINZ House Sales rose +11.7% YoY vs. 14.3% in Jun.
- New Zealand Jul. Business PMI out at 53.2 vs. 54.3 in Jun.
- Japan Jun. Machine Orders out at +7.7% MoM and +17.9% YoY vs. +1.7%/+11.2% expected, respectively and vs. +10.5% YoY in May
- New Zealand Aug. ANZ Consumer Confidence out at 113.3 vs. 109.4 in Jul.
- Australia Jul. Employment Change out at -0.1k vs. +10k expected and 18.2k in Jun.
- Australia Jul. Unemployment Rate out at 5.1% vs. 4.9% expected and 4.9% in Jun.
- Sweden Jul. Headline CPI out at 0.0% MoM and +3.3% YoY vs. -0.1%/+3.2% expected, respectively and vs. +3.1% YoY in Jun.
- Sweden Jul. Core CPI out at -0.2% MoM and +1.6% yoY vs. -0.3%/+1.5% expected, respectively and vs. +1.5% YoY in Jun.
- Canada Jun. New Housing Price Index out at +0.3% MoM and +2.1% YoY as expected and vs. +1.9% YoY in May
- Canada Jun. International Merchandise Trade out at -1.6B vs. -0.8B expected and -1.0B in May
- US Jun. Trade Balance out at -$53.1B vs. -$48.0B expected and -$50.8B in May
- US Weekly Initial Jobless Claims out at 395k vs. 405k expected and 402k last week
- US Weekly Continuing Claims out at 3688k vs. 3725k expected and 3748k last week
- US Weekly Bloomberg Consumer Comfort Index (1345)
- New Zealand Jul. Non-resident Bond Holdings (0300)
Love this blog, keep up the great work wish you all the best
ReplyDeletesell your house fast