The Waiting Game On Switzerland And Japan. By Katie Martin
Which central bank will intervene in the currency markets first: the Swiss National Bank or the Bank of Japan?
The chance that either will come into the market to tackle the soaring yen or franc is enough to put many traders off buying either currency against the dollar or the euro.
That means that buying one against the other in a "who will blink first?" trade is happy hunting ground for the brave.
This is, perhaps, a sign of how desperate currencies analysts are getting for good trades. Almost all major currencies [and indeed commodity-linked and emerging-market currencies too] are flashing bright red sell signals at the moment, so analysts and investors are forced to come up with some pretty creative ideas.
It does make sense, though, so it's worth weighing up the two.
By one measure, the Swiss are the more likely to take the plunge. After all, in real terms, the franc is stronger now than the yen, BNP Paribas pointed out in a note to clients last week. Some market-watchers believe that means the Japanese authorities will sit back and watch the yen climb much more--as long as it's a slow and steady move--before they try to flog it back down.
Still, even though the franc is now at an all-time high against the euro, which Monday sank below CHF1.2950 for the first time, few if any serious franc-watchers think a sting is coming.
That's partly because the Swiss economy keeps on proving itself perfectly capable of taking this strain, despite the risk to exports. Friday, the country's KOF index--a key leading indicator--did edge lower, suggesting that the country's economic recovery will slow for the rest of the year. Still, it was not a sharp pullback, and it comes after the index hit its highest level in four years in July.
If franc strength is seriously damaging, then that's not clear in the KOF think-tank's report, and the central bank is still reasonably likely to raise interest rates at some point late in 2010.
What's more, the SNB has already tried a heavy-duty program of franc selling this year, and it didn't exactly work, although one can argue that the franc would be much higher now if the central bank hadn't worked so hard to hold it down. The central bank's interventions, particularly during April and May when it was swimming against a heavy tide of euro weakness, "were a mistake," BNP Paribas said.
So, rule Switzerland out of the race to intervene, and buy the franc against the yen, the French bank concludes.
The chorus of political pressure in Japan for the central bank there to do something, anything, about yen strength is certainly pretty loud, and indeed, further easing measures are starting to emerge.
At an emergency meeting Monday, the Bank Of Japan's policy board voted to offer domestic financial institutions Y10 trillion of six-month loans at an ultralow rate of 0.1%. This was in addition to the Y20 trillion in three-month loans it had already been offering. We are constantly reminded that the authorities in Tokyo are watching the yen's climb with intense interest. Right now, though, the market is skeptical, and traders are continuing to push the currency higher.
Direct intervention, of the kind that is being threatened probably wouldn't work for long, particularly if Japan dived into the market without the help of the U.S. or the euro zone. It would also undermine international efforts to convince China to let the yuan climb. Still, a Japanese zap on the yen does seem somewhat more likely than a Swiss move. If the worst comes to the worst, and neither blinked, selling the yen against the franc in anticipation of such a development is a cheap bet to run.
In early European trading Tuesday, the currencies market was showing clear signs of nerves, with the yen and the franc--both seen as safe havens in times of stress--moving higher.
The euro was at CHF1.2940, according to trading system EBS, having dipped to a fresh record low of CHF1.2932 in Asian trading hours. It was at around CHF1.30 late in New York Monday.
The dollar was at Y84.12 against the yen, from around Y84.75.
The euro was weaker at $1.2643 from $1.2675, while sterling was also lower at $1.5431, from $1.5466.
The chance that either will come into the market to tackle the soaring yen or franc is enough to put many traders off buying either currency against the dollar or the euro.
That means that buying one against the other in a "who will blink first?" trade is happy hunting ground for the brave.
This is, perhaps, a sign of how desperate currencies analysts are getting for good trades. Almost all major currencies [and indeed commodity-linked and emerging-market currencies too] are flashing bright red sell signals at the moment, so analysts and investors are forced to come up with some pretty creative ideas.
It does make sense, though, so it's worth weighing up the two.
By one measure, the Swiss are the more likely to take the plunge. After all, in real terms, the franc is stronger now than the yen, BNP Paribas pointed out in a note to clients last week. Some market-watchers believe that means the Japanese authorities will sit back and watch the yen climb much more--as long as it's a slow and steady move--before they try to flog it back down.
Still, even though the franc is now at an all-time high against the euro, which Monday sank below CHF1.2950 for the first time, few if any serious franc-watchers think a sting is coming.
That's partly because the Swiss economy keeps on proving itself perfectly capable of taking this strain, despite the risk to exports. Friday, the country's KOF index--a key leading indicator--did edge lower, suggesting that the country's economic recovery will slow for the rest of the year. Still, it was not a sharp pullback, and it comes after the index hit its highest level in four years in July.
If franc strength is seriously damaging, then that's not clear in the KOF think-tank's report, and the central bank is still reasonably likely to raise interest rates at some point late in 2010.
What's more, the SNB has already tried a heavy-duty program of franc selling this year, and it didn't exactly work, although one can argue that the franc would be much higher now if the central bank hadn't worked so hard to hold it down. The central bank's interventions, particularly during April and May when it was swimming against a heavy tide of euro weakness, "were a mistake," BNP Paribas said.
So, rule Switzerland out of the race to intervene, and buy the franc against the yen, the French bank concludes.
The chorus of political pressure in Japan for the central bank there to do something, anything, about yen strength is certainly pretty loud, and indeed, further easing measures are starting to emerge.
At an emergency meeting Monday, the Bank Of Japan's policy board voted to offer domestic financial institutions Y10 trillion of six-month loans at an ultralow rate of 0.1%. This was in addition to the Y20 trillion in three-month loans it had already been offering. We are constantly reminded that the authorities in Tokyo are watching the yen's climb with intense interest. Right now, though, the market is skeptical, and traders are continuing to push the currency higher.
Direct intervention, of the kind that is being threatened probably wouldn't work for long, particularly if Japan dived into the market without the help of the U.S. or the euro zone. It would also undermine international efforts to convince China to let the yuan climb. Still, a Japanese zap on the yen does seem somewhat more likely than a Swiss move. If the worst comes to the worst, and neither blinked, selling the yen against the franc in anticipation of such a development is a cheap bet to run.
In early European trading Tuesday, the currencies market was showing clear signs of nerves, with the yen and the franc--both seen as safe havens in times of stress--moving higher.
The euro was at CHF1.2940, according to trading system EBS, having dipped to a fresh record low of CHF1.2932 in Asian trading hours. It was at around CHF1.30 late in New York Monday.
The dollar was at Y84.12 against the yen, from around Y84.75.
The euro was weaker at $1.2643 from $1.2675, while sterling was also lower at $1.5431, from $1.5466.
- 31 August |
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