EUR/CHF, A History, The Game Changes: April 2012

Thanks Goose for the reminder that the SNB released figures on its FX reserves holdings and these showed a marked increase in GBP holdings. This has been a constant theme over the last few weeks/months, the SNB buys EUR/CHF in the marketplace and then uses the BIS to offload some of the extra EUR by selling EUR/USD, EUR/GBP, EUR/JPY, EUR/CAD, EUR/AUD etc.

• Losses on foreign currency positions amounted to CHF 2.6 billion for the first three months of the year
• Net result on foreign currency positions of CHF -2.6 billion was largely due to exchange rate losses

EUR/CHF remains steady at 1.2015.

Reuters headline.

Oh go on, might be good for a 20 pip rally in EUR/CHF

Personally I wouldn’t have said anything, would have left the market guessing. But then that’s only me, what do I know?

EUR/CHF sits at 1.2012, twiddling it’s thumbs and whistling a melancholy tune.

• Currency cap is extreme measure, cannot be set up for any desired level free of risk
• Can take further measures, if deflation risk and economic outlook so require
• Reasons for confidence in Swiss economy but still sees risks
• Sees potential for downside risks to price stability if franc does not weaken further as expected
• Sees no inflation risk for foreseeable  future, threat of deflation kept in check
• Swiss interest rates likely to remain low for a while, carries risk of longer-term imbalances

EUR/CHF cops a deaf’un to the comments, unchanged on the day at 1.2014.

‘we will enforce this policy under all circumstances’

Simples

According to Dow Jones, the bank sees the SNB raising the peg to 1.2500 from 1.2000 over the next quarter.

They say the move would help the SNB to loosen monetary policy and would be tactical to ensure the floor continues to meet little challenge.   Interesting.

Kinda like, the best form of defence is offence.  Jamie and I have had numerous conversations on this topic.  So much so he’s nearly talked me out of expecting a rise in the peg anytime soon

Anyways, I think it’s a very ballsy call by the bank.

Just think if they get it wrong, the more negative among you can have a field day taking the piss

The cross has soared (yer right) to 1.2028 from the 1.2015 which greeted me first thing. zzzzzzzzzzzzz

Hardly surprising.

EUR/CHF up 5 pips from when I got in, presently at 1.2020.

This is way of adding liquidity to money markets, keeping swiss rates low.

Here you go

The SNB face a unique set of issues when intervening in the Asian timezone, namely the lack of credit lines which is has with all Asian banks. What this in effect means, is that the SNB could be on the bid at 1.2000 for EUR8 billion, as it was last week, but other counterparties could be offering at 1.1995 as they have no limits to trade with the SNB. This of course offers excellent arbitrage opportunities for banks who have credit lines with both sides, but banks will also baulk at taking on large credit risk for the sake of a quick 5 pip arb.

I’m hearing from a Swiss bank source, that the 1.2000 ‘cap’ isn’t meant to be an absolutely definitive ‘do not pass’ line and that the SNB may press the release valve if the numbers get too big, allowing stops to go off before they try and re-establish the CHF cap. Sounds very risky to me, as once below 1.2000 it will be very hard to regain the level again.

The SNB has put itself in an absolutely terrible position from a market perspective, and I guess the only way out for them is to keep printing fresh CHF to pay for the exercise. This may go against the grain of the Swiss psyche but they would only be doing what everyone else is doing.

Our readers have known about this (at the 3:55 mark) for ages. Now readers of the WSJ do to…

Overnight interbank reports say that Eastern European and Middle Eastern central banks were busy on both sides of the market yesterday, with buyers below 1.3080 and sellers emerging 1.3140/50.

The BIS have been an active seller in recent days and I think this might be related to the SNB’s intervention in EUR/CHF. The SNB must sanitise part of their purchases (between EUR 7 and 8 billion) by diversifying about 70% of their total EUR purchases into USD mainly, but also into GBP and JPY. They prefer to do this through the BIS rather than going straight to the market themselves as their credit lines are already pretty full with many trading banks. This EUR/CHF buying and subsequent sanitisation also goes some way to explaining the pressures on EUR/GBP and EUR/JPY over the last week or so.

Intervened at the time.

• Any doubts on SNB resolve to defend franc cap misplaced
• SNB has no plans to change monitoring system of EUR/CHF
• SNB cannot exclude euro being offered below CHF 1.2000 in future
• To enforce minimum rate with all means at its disposal
• Ready to buy foreign exchange in unlimited quantities
• Policy unchanged after franc rises above CHF 1.2000
• Some EUR/CHF transactions occurred below CHF 1.2000 on Thursday
• At no time did ‘best available rate’ fall below 1.2000
• SNB credibility hasn’t suffered from breach of the floor
• Banks may breach CHF 1.2000/euro, but not in ‘relevant market’
• SNB cannot completely control global CHF currency market
• SNB franc cap breach was in ‘segmented fx market’
• Swiss franc still ‘overvalued’
• Franc poses substantial challenges for Swiss economy
• Confirms SNB ‘active’ in currency market Thursday

Dow Jones reporting.

EUR/CHF trading at session high 1.2030.  Whoopeeee

The FX market at its core is made up of a number of large banks, commercial, investment and central, who all have agreed trading limits with each other. Two counterparties can only deal with each other when they have available credit lines open. On Thursday, the SNB was on the bid at 1.2000 for up to EUR10 billion yet the market traded below there, with some interbank platforms reporting lows at 1.1990. This can happen because those neding to sell do not have a credit line (trading limit) with the SNB and so are forced to hit the next best bid. Those selling below the SNB bid must either have been very panicked or else have had less than perfect market information.

This is what I’ve been warning about for the last few weeks as it’s the sort of thing that can happen on a Monday morning, but usually should not happen on a Thursday morning in European liquidity.

It’s a long weekend in many centres but early interbank trade can nonetheless be a very volatile time. That’s not the case this morning with EUR/CHF still holding above 1.2000 and USD/JPY having triggered all the big stops on Friday night.

EUR/USD is trading at 1.3100, AUD/USD at 1.0305, USD/JPY at 81.50 and cable 1.5885.

Good luck today.

Simple. You guys are all long. Why would they hand you a profit?

If you were short, they could hurt you, like they did back in September.

While defending a peg by selling your own currency is easier than having to buy your own currency and running the risk of depleting your limited fores reserves, it is not without risk.

The SNB lost billions when trying to unofficial pegging EUR/CHF around 1.50 back in 2009. And they stand to lose billions more if they fail at 1.2000.

EUR/CHF fell as low as 1.2008 in the disarray after non-farm payrolls.

I don’t believe SNB bids are vulnerable due to the holiday so there is probably minimal risk of a true break below 1.20. The greater risk might be that the SNB intervenes in the thin market to give itself some breathing room.

• They say all trades were good and normal trading conditions existed.
• They said the low was due to “a lack of bi-lateral credit relationships”

I’m not entirely sure how to feel about the SNB. Most retail broker screens seem to have a bottomed around 1.1995, EBS shows 1.1990, Bloomberg says 1.1999 but there is no consensus. Let’s take a look at how the major financial press has characterized today’s move before I share my thoughts.

From the FT:

Traders suggested the breach was a largely technical issue, however. An analyst said: “It was probably some regional bank with no credit limits, and the lack of liquidity took it below SFr1.20.”

The WSJ noted thin pre-Easter markets as a factor (doubtful) and says the SNB came in after the breach:

Traders said the Swiss National Bank bought euros in the market shortly after its floor was breached, helping the common currency to move back up to 1.2016 francs recently…  “It will be difficult for momentum to build for investors to start positioning against the floor,” said Michael Sneyd, a currency strategist at BNP Paribas.

Reuters cites some research from RBC that suggests upcoming EUR/USD and EUR/JPY buying:

The euro hit a low of 1.1992 francs, according to Reuters data, before recovering… Earlier in the day, RBC Capital Markets said the Swiss National Bank had bought about 1 billion euros against the franc. Given the SNB’s reserves are 50 percent in euros, 25 percent in dollars, 9 percent in yen, 5 percent in sterling, 4 percent in the Canadian dollar and 4 percent in other currencies, the bank said half that 1 billion euros can stay in euros but the rest will have to be recycled into the other reserve currencies in the same proportions.

Bloomberg says a “street fight looms” between the SNB and markets. They note comments from late March from the SNB’s Danthine :

The SNB applies a “zero-tolerance principle” on its cap, Danthine said as recently as March 22. It “ensures day and night that the minimum exchange rate is maintained — from Sunday night when the markets open in Sydney until Friday night when markets close in New York.”

Here’s a take from Credit Suisse, quoted by Bloomberg:

“We think that the move was driven by renewed Europe- centric bouts of risk aversion and an attack on the floor drivenby significant orders by speculators,” said Bernd Berg, a currency strategist at Credit Suisse in Zurich. “As the move drove euro-franc below 1.20 the SNB reconfirmed its credibility by coming into the market and also verbally reconfirming its commitment to the floor. We therefore think the floor will hold.”

SocGen did a poll with 6600 people (mostly yesterday but some after the breach today) and 75% said the floor will hold. They said confidence was especially high in Switzerland.

After reading through everything I can get my hands on, it seems to me that most commentators have missed the point. The market was largely doing the SNB’s work because the Swiss central bank had credibility. There is no doubt, to me, that this credibility has been damaged, at least for retail traders. The only question is, how much damage has been done? How much less likely are you to buy EUR/CHF? How much more likely to short the pair?

I’m being told that some banks are not filling orders under 1.2000 on this move, and one major Swiss name is  remaining adamant that the low was 1.2000, citing the earlier mentioned credit issues for the dip below the peg.

There’s some talk in the street that the SNB was on the bid all the time at 1.2000, but the break below was caused by some banks that couldn’t see the SNB bids due to limit issues.

Actually does sound plausible

Bring back the voice brokers, then that probably wouldn’t have happened…….

EUR/CHF’s up again around 1.2020 from lows of 1.1990

Overnight interbank reports say that Eastern European and Middle Eastern central banks were busy on both sides of the market yesterday, with buyers below 1.3080 and sellers emerging 1.3140/50.

The BIS have been an active seller in recent days and I think this might be related to the SNB’s intervention in EUR/CHF. The SNB must sanitise part of their purchases (between EUR 7 and 8 billion) by diversifying about 70% of their total EUR purchases into USD mainly, but also into GBP and JPY. They prefer to do this through the BIS rather than going straight to the market themselves as their credit lines are already pretty full with many trading banks. This EUR/CHF buying and subsequent sanitisation also goes some way to explaining the pressures on EUR/GBP and EUR/JPY over the last week or so.

Intervened at the time.

• Any doubts on SNB resolve to defend franc cap misplaced
• SNB has no plans to change monitoring system of EUR/CHF
• SNB cannot exclude euro being offered below CHF 1.2000 in future
• To enforce minimum rate with all means at its disposal
• Ready to buy foreign exchange in unlimited quantities
• Policy unchanged after franc rises above CHF 1.2000
• Some EUR/CHF transactions occurred below CHF 1.2000 on Thursday
• At no time did ‘best available rate’ fall below 1.2000
• SNB credibility hasn’t suffered from breach of the floor
• Banks may breach CHF 1.2000/euro, but not in ‘relevant market’
• SNB cannot completely control global CHF currency market
• SNB franc cap breach was in ‘segmented fx market’
• Swiss franc still ‘overvalued’
• Franc poses substantial challenges for Swiss economy
• Confirms SNB ‘active’ in currency market Thursday

Dow Jones reporting.

EUR/CHF trading at session high 1.2030.  Whoopeeee

The FX market at its core is made up of a number of large banks, commercial, investment and central, who all have agreed trading limits with each other. Two counterparties can only deal with each other when they have available credit lines open. On Thursday, the SNB was on the bid at 1.2000 for up to EUR10 billion yet the market traded below there, with some interbank platforms reporting lows at 1.1990. This can happen because those neding to sell do not have a credit line (trading limit) with the SNB and so are forced to hit the next best bid. Those selling below the SNB bid must either have been very panicked or else have had less than perfect market information.

This is what I’ve been warning about for the last few weeks as it’s the sort of thing that can happen on a Monday morning, but usually should not happen on a Thursday morning in European liquidity.

It’s a long weekend in many centres but early interbank trade can nonetheless be a very volatile time. That’s not the case this morning with EUR/CHF still holding above 1.2000 and USD/JPY having triggered all the big stops on Friday night.

EUR/USD is trading at 1.3100, AUD/USD at 1.0305, USD/JPY at 81.50 and cable 1.5885.

Good luck today.

Simple. You guys are all long. Why would they hand you a profit?

If you were short, they could hurt you, like they did back in September.

While defending a peg by selling your own currency is easier than having to buy your own currency and running the risk of depleting your limited fores reserves, it is not without risk.

The SNB lost billions when trying to unofficial pegging EUR/CHF around 1.50 back in 2009. And they stand to lose billions more if they fail at 1.2000.

EUR/CHF fell as low as 1.2008 in the disarray after non-farm payrolls.

I don’t believe SNB bids are vulnerable due to the holiday so there is probably minimal risk of a true break below 1.20. The greater risk might be that the SNB intervenes in the thin market to give itself some breathing room.

• They say all trades were good and normal trading conditions existed.
• They said the low was due to “a lack of bi-lateral credit relationships”

I’m not entirely sure how to feel about the SNB. Most retail broker screens seem to have a bottomed around 1.1995, EBS shows 1.1990, Bloomberg says 1.1999 but there is no consensus. Let’s take a look at how the major financial press has characterized today’s move before I share my thoughts.

From the FT:

Traders suggested the breach was a largely technical issue, however. An analyst said: “It was probably some regional bank with no credit limits, and the lack of liquidity took it below SFr1.20.”

The WSJ noted thin pre-Easter markets as a factor (doubtful) and says the SNB came in after the breach:

Traders said the Swiss National Bank bought euros in the market shortly after its floor was breached, helping the common currency to move back up to 1.2016 francs recently…  “It will be difficult for momentum to build for investors to start positioning against the floor,” said Michael Sneyd, a currency strategist at BNP Paribas.

Reuters cites some research from RBC that suggests upcoming EUR/USD and EUR/JPY buying:

The euro hit a low of 1.1992 francs, according to Reuters data, before recovering… Earlier in the day, RBC Capital Markets said the Swiss National Bank had bought about 1 billion euros against the franc. Given the SNB’s reserves are 50 percent in euros, 25 percent in dollars, 9 percent in yen, 5 percent in sterling, 4 percent in the Canadian dollar and 4 percent in other currencies, the bank said half that 1 billion euros can stay in euros but the rest will have to be recycled into the other reserve currencies in the same proportions.

Bloomberg says a “street fight looms” between the SNB and markets. They note comments from late March from the SNB’s Danthine :

The SNB applies a “zero-tolerance principle” on its cap, Danthine said as recently as March 22. It “ensures day and night that the minimum exchange rate is maintained — from Sunday night when the markets open in Sydney until Friday night when markets close in New York.”

Here’s a take from Credit Suisse, quoted by Bloomberg:

“We think that the move was driven by renewed Europe- centric bouts of risk aversion and an attack on the floor drivenby significant orders by speculators,” said Bernd Berg, a currency strategist at Credit Suisse in Zurich. “As the move drove euro-franc below 1.20 the SNB reconfirmed its credibility by coming into the market and also verbally reconfirming its commitment to the floor. We therefore think the floor will hold.”

SocGen did a poll with 6600 people (mostly yesterday but some after the breach today) and 75% said the floor will hold. They said confidence was especially high in Switzerland.

After reading through everything I can get my hands on, it seems to me that most commentators have missed the point. The market was largely doing the SNB’s work because the Swiss central bank had credibility. There is no doubt, to me, that this credibility has been damaged, at least for retail traders. The only question is, how much damage has been done? How much less likely are you to buy EUR/CHF? How much more likely to short the pair?

I’m being told that some banks are not filling orders under 1.2000 on this move, and one major Swiss name is  remaining adamant that the low was 1.2000, citing the earlier mentioned credit issues for the dip below the peg.

There’s some talk in the street that the SNB was on the bid all the time at 1.2000, but the break below was caused by some banks that couldn’t see the SNB bids due to limit issues.

Actually does sound plausible

Bring back the voice brokers, then that probably wouldn’t have happened…….

EUR/CHF’s up again around 1.2020 from lows of 1.1990

SNB Spokesman Says Won’t Accept Exchange Rate Below 1.2000 Francs Per Euro

EUR/CHF Trades Fleetingly Under 1.2000 Peg

Swiss March CPI +0.6% M/M, -1.0% Y/Y

SNB’s Danthine: Franc Overvalued – Tribune De Geneve

EUR/CHF: SNB And Stop-Loss Levels

I’d Be A Little Nervous If I Were The SNB

EUR/CHF Orders: SNB Expected At 1.2020