SNB woke up…

The Swiss National Bank finally woke up to the reality of, as they called it “massively overvalued” franc and decided to act. The tactic changed a bit though – instead of the fx intervention we see the Bank increasing liquidity targets (narrowing the target rate has no practical implications since the LIBOR was already below 20bps so it comes down to increasing money supply). Will that be enough to reverse the course on the franc? Probably not, with record yields in Southern Europe and recovery concerns elevated (and likely to get even more serious) the pressure won’t leave the franc anytime soon.

Still, this means that one substantial factor has changed. As recently as June the SNB issued a semi-hawkish statement following a quarterly meeting and remained silent for weeks, encouraging speculative capital to bet on the franc. While it is hard to see a major change on the CHF without more favorable global conditions, the SNB has still few options to use including long-term bond purchases, setting some explicit period of ultra-low rates (like BoC did during the recession) and intervening directly on the FX.

Keeping in mind that investors on “risk” markets (mainly equities) actually panicked yesterday, the intervention may be assessed as a success – without that move we would be probably closer to 1,05 than 1,11. A short-term target for the bulls is at 1,14 – a previous low from mid-July and a lower limit of a declining channel. Should circumstances allow for a larger upward correction, the target will be at 1,23-1,25 – levels that SNB could be more comfortable with. (see the graph on the next page)

…BOJ follows…

The SNB probably offered an inspiration for the Japanese authorities who couldn’t be happy to see the yen hitting fresh all-time highs vs the dollar. The BoJ shortened the meeting as it decided to expand a program of asset purchases and intervene on the FX, pulling the pair from less than 77 to as high as 79,40. That’s close to the resistance at ca. 79,55 with another one at 81,35.

The more interventions the greater chance of a success but both the SNB and the BoJ have the same enemy – global economic slowdown. If equity markets continue to freefall the banks might find it hard to go against the tide. In these circumstances the payrolls report will be even more crucial – a solid number may at least trigger some relief-rally, compounding effects of those interventions.

…will ECB help?

Markets will be watching Trichet’s conference closely today as his rhetoric is bound to change – the question is how much. Trichet, inflation hawk and a declared enemy of a default in Greece just month ago might be already sorry for the recent hike (we do not see ECB lifting rates anytime soon, certainly not again this year) but the question is if he’s going to offer any help to Italy and Spain. We think that he should but he will not. ECB really has common interests with the SNB as soaring franc and credit spreads in the peripheries of the zone is the same story. EFSF will not be authorized to intervene on the bond markets for weeks to come. Until it is, the ECB should be playing that role but we all saw how orthodox Trichet was about it before and thus we remain skeptical this time around.

Events to watch – Spanish bond auction, central banks, US claims

Trichet’s conference (8.30 ET, 14.30 CET, decision 7.45 ET, 13.34 CET) might be the key event today but the Spanish 3 and 4Y bond auction (2,5-3,5 bln EUR) is nearly as important. If Spaniards can sell the bonds with a significant demand at current yields, that may help the secondary market substantially. The BoE (7.00 ET, 13.00 CET) has no choice but staying put at the moment. On the macro front we have industrial orders in Germany (6.00 ET, 12.00 CET, consensus -0,6% m/m) and the US weekly claims (8.30 ET, 14.30 CET, consensus 405k).      

Przemysław Kwiecień PhD, Chief Economist

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