Do Not Upset the Swiss

Been there, seen that. It sums up the actions from both the Fed and Swiss authorities. The Fed’s pledges have left the CHF exposed to a market having the currency in its crosshairs. Unless the Fed is willing to intervene in the FX space and stop ‘this’ dollar slide, the Swiss acting alone has an near impossible task.

Investors desires for a safe heaven outside of the Euro-zone and US debt dramas is producing massive gains for CHF against other majors. Reason enough for authorities to step up their efforts to cool ‘the’ move. The SNB this morning announced that it would rapidly expand banks’ most readily available deposits from CHF80b to CHF120b, and would conduct FX swap transactions. Last week, the SNB cut its three-month Libor rate target to zero in another effort to curb the CHF appreciation.

Looking at the post price action, this ‘symbolic’ act by the SNB is having limited reaction. Their measures are a repeat of earlier actions. The fact that they have failed to intervene and sell francs is again giving the market the green light to proceed, but, with caution!

The US$ is mixed in the O/N trading session. Currently, it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ session.

Markets were probably looking for lies or half truth, instead, they got a Fed giving us the raw truth. Policy makers painted a dour picture of the US economy, going beyond the simple transient factors. Ben and company pledged for the first time to keep benchmark rates at a record low, at least through mid-2013, to revive a recovery that’s ‘considerably slower’ than anticipated. They were vocal about a range of policy tools in their armory to boost the economy and said it is ‘prepared to employ these tools as appropriate’. With these promises they stopped short of initiating a QE3 package of large-scale asset buying. Fed expect a ‘somewhat slower pace of recovery over the coming quarters and that downside risks to the economic outlook have increased’.

Interestingly the vote was 7-3. Dissent suggests that the Fed is still a long way off from providing ‘dramatic new support for an economy that even policymakers acknowledge has taken a turn for the worse’. However, in five months the dissenters become nonvoters at the Fed.

The dollar is lower against the EUR +0.06% and JPY +0.47% and higher against GBP -0.33% and CHF -0.25%. The commodity currencies are mixed this morning, CAD -0.47% and AUD +0.21%.

After printing parity in the previous session of panic liquidation, the loonie has found firmer footing, rising for the first time in eight days as an advance in ‘stateside’ equities reduced demand for a refuge in the greenback. Because of the stronger Canadian fundamentals, investors will want to divest away from the EUR and USD. Currently, there is an appetite from investors for a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket.

Yesterday, Canadian housing starts climbed last month at the fastest pace in 15-months, proof that Canadian real estate remains buoyant as borrowing costs stay low. Work began on +205k units on a seasonally adjusted annual basis. Previously, the loonie has been trading on the back foot on concern slowing global economic growth will weigh on demand for raw materials and increase risk aversion trading strategies.

Last week’s historic S&P’s downgrade is creating a new financial and trading environment. For the time being in a while, the loonie will remain at the mercy of risk aversion trading strategies and commodity prices. In the O/N market, investors look to be better sellers of dollars on rallies (0.9810).

The wild ride for commodity currencies continues, with the AUD being the prime example. A matter of day’s ago, the market was happily singing its praises, witnessing the currency breach the 1.10 barrier, some weaker global data and a credit downgrade later and this growth and interest rate sensitive currency is bouncing back from the USD trading premium a couple of sessions ago.

Recent domestic data is providing little support. In the O/N session, the market witnessed Aussie consumer confidence deteriorating for a fourth consecutive month, to the lowest level in more than two years (-3.5% to 89.6) and with no expected turnaround soon.

Big picture, the currency continues to find the going tough, as concern that the global economy is slowing is sapping demand for higher-yielding assets. The US credit downgrade has been pressurizing commodities, which in turn is negative for all growth sensitive currencies. In one session, the currency breached all major key support levels that resulted in parity again being printed, first time in five month. This new range now depends on how the market is digesting yesterday’s FOMC statement. In current climate conditions, investors remain better sellers on upticks (1.0355).

Crude is higher in the O/N session ($82.17 up +$2.87c). The decline of crude prices took a breather before the Fed’s communique. They rebounded from their ten-month low as US equity indices stopped the bleeding and on the belief that the earlier price rout was excessive. The market expected that the Fed’s commitment to monetary stimulus would help fuel demand in the world’s largest economy, however, the new ‘raw’ Ben soon put a stop to that. The Fed stating that risks to the economic outlook have increased and stopping short of initiating QE3, again put the black stuff under pressure. Investors are now betting fuel demand will increase amid shrinking stockpiles.

OPEC cut its oil demand forecasts for the remainder of this year and next as the global economic recovery loses momentum. They have reduced global consumption estimate for this year by-150k barrels a day. The organization is obviously worried about the global economy and falling demand. To date, they do not have a specific price target that would trigger member action.

Today we get the weekly inventory number and analysts expect another small build in the EIA report midmorning. Last week, US gas stockpiles rose sharply and demand over the past four-weeks fell-3.6% compared with a year-ago, adding to concerns about tepid consumption in the midst of the peak summer demand period. Currently, crude is straddling strong support levels and is in danger of penetrating the psychological $75 barrier medium term.

Gold has surged to another new record high, breaking through key psychological barriers, after a US downgrade and on escalating concerns that global economies are losing momentum. The yellow metal continues to be a recipient of safe-haven flows. The metal’s price has more than doubled since the recession began in late 2007. This summer, its climb has accelerated because of the US Congress inability to stabilize the government’s ‘medium-term debt dynamics’, and on the back of Europe’s debt crisis threatening to spread to two of its biggest economies, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven.

With global bourses on the back foot, liquidation of the metal to cover margin calls in other asset classes could pare some of these sharp gains. Investors have bought more gold in the last month than in the prior six months according to CFTC data last week.

Year-to-date, the yellow metal has advanced +24.3%, heading for its eleventh consecutive annual gain. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on pullbacks until proven wrong. There remains a demand for the commodity for insurance purposes as alternative asset class. In this environment $2,000 is very much in the realms of possibility over the next six months ($1,759 +$59).

The Nikkei closed at 9,038 up+94. The DAX index in Europe was at 6,003 up+86; the FTSE (UK) currently is 5,199 up+34. The early call for the open of key US indices is lower. The US 10-year eased 28bp yesterday (2.27%) and is little changed in the O/N session.

Treasuries are rising, pushing 10’s and two-year note yields to an all-time low after Ben promised to keep benchmark rates at record lows for two more years in a bid to revive economic growth. Yesterday’s government sale of $32b three-year notes drew stronger-than-average demand in the first note sale since their debt rating downgrade. Demand for US debt has surged in the last few sessions, as plummeting global bourses boosted the demand for the safety of US product.

The notes drew a yield of +0.50% with a bid-to-cover ratio of 3.29, compared with an average of 3.15 for the past 10 sales. Indirect-bidders took down +47.9% of the notes, compared with an average of +33.9% for the past 10 sales. Direct-bidders received +11.1% of the notes compared with an average of +13.2% for the past 10 auctions.

Today dealers get to take down +$24b of 10’s and +$16b of 30-year bonds tomorrow. Yield is hard to find.

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