Safe Haven CHF Leaves Investors Exposed to SNB Wrath

Finding temporary safety to alleviate some of the Grexit pressure that is currently being imposed on capital markets is not that easy. Even the traditional safer option, like owning CHF, is becoming a bit of a problem. The weekend moves by the Greek government to call for a referendum on July 5 ensures there is no quick fix for their situation.

A referendum in favor of Prime Minister Alexis Tsipras’s position virtually guarantees a Grexit, while support for Greece’s creditors’ offer should automatically force new federal elections and lead to further months of delays. At this point it would be difficult to get the eurozone’s officials back to the negotiation table; they have lost their patience with Greece. Only a significant and sustainable market selloff will be able to pressure the eurozone to want to talk.

However, the probability that the Greek populace would vote to stay within the confines of the European Union could provide the basis for more talks and negotiations. Until then, Greek capital controls will probably remain in place, while tomorrow, Greece will default on the money it owes the International Monetary Fund.

Safe-Haven Picks Difficult

There are no sure safe-haven bets. In times of flight, investors historically gravitate toward the reliable – gold, CHF, JPY, USD, bonds — but they, too, are currently sending mixed signals.

The EUR naturally took a beating on the Asian open, plummeting a big figure and change from Friday’s close to €1.0966, and has since managed to fill in the freefall gap mostly on eurozone rhetoric. Nevertheless, with the eurozone’s current predicament, the EUR bear will continue to feel confident that they have the upper hand.

It’s natural to see hedge funds wanting to lighten up on their European periphery bond exposure, especially when they had been expecting an eleventh hour deal. However, despite the heavy selloff in eurozone bonds this morning, current yields would suggest that the market remains somewhat content that Greece is not entirely on the verge of leaving the eurozone. Hotspot countries like Spain, Italy, and Portugal yield spreads to the German Bund have only managed to widen out to levels printed a week ago. Thus far, all the market seems to have done is price out some of last week’s initial optimism that a deal would be done. Periphery bond prices remain some ways off from pricing in a Grexit knock-on effect just yet.

Even U.S. Treasury yields are not portraying that sinking feeling. Yes, bonds have rallied along with other core eurozone bonds, but they are well off their intraday low-yield print during the Asian session. U.S. 10-years trade at +2.35%, falling from Friday’s close of +2.40% and rising from the overnight low of +2.30%. U.S. yields have a fair bit of domestic data to chew through before shutting down for the holiday-shortened week. Obviously, Thursday’s nonfarm payrolls report will be of particular interest to both money market and fixed-income traders. They have yet to convincingly price in a September rate lift off, it’s still 50-50.

Swiss Intervene to Weaken the Franc

The Swiss National Bank’s (SNB) underhanded policy moves it pulled last January (scrapping the €1.20 currency cap) certainly left a bad taste in investors’ mouths. Nevertheless, their currency is historically always in demand during “fight or flight” situations. However, it has been a prudent move to listen to SNB Chairman Thomas Jordan for directional clues, especially when the Swiss franc remains in such demand mostly from a safe-haven perspective.

The SNB has been intervening in the forex market since it abandoned the EUR/CHF peg five-months ago, but it would not confirm such intervention. Last week the SNB again reiterated that it could still intervene in the forex market, and/or apply more negative interest rates to release some of the external pressures on their currency. Verbal intervention seems to be the first tool of choice to weaken a currency. Still, today the SNB took an unusual step and said that it has intervened in the market.

Being proactive and vocal would suggest that Swiss policymakers want to discourage speculative “long” CHF positions to accumulate. The SNB acknowledges the “extreme uncertainty” that policymakers have to currently digest, but also admits that the SNB is not unprepared for a Greek default. The SNB has already set a precedent of not sticking to the script. Therefore, owning CHF is not as easy or safe as it once was. Perhaps the SNB is required to go more negative on rates.

Because of the SNB’s actions, investors seem to be gravitating more toward JPY for primary surety reasons. Market consensus believes that the Bank of Japan is likely to be happy to see JPY (¥122.87) pullback from its recent lows. Politicians have been trying to talk yen back up for a while and this move has been rather orderly.

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