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SNB out with a surprise 100 bp cut

Fri, Nov 21 2008, 08:05 GMT
by John Hardy

Saxo Bank

Deal, NO Deal on US automakers sees wild JPY cross gyrations. EURUSD still not sending any clear signals.

MAJOR HEADLINES – PREVIOUS SESSION

• Switzerland SNB lowered Libor Target Rate by 100 bps to 1.00%

• US Nov. Philadelphia Fed out a -39.3 vs. -35.0 expected

• Bank of Japan kept target rate at 0.30% as expected

THEMES TO WATCH – UPCOMING SESSION

Events Today:

• Germany Nov. Preliminary Manufacturing and Services PMI (0830)

• EuroZone Nov. Preliminary Manufacturing and Services PMI (0900)

• Canada Oct. CPI (1200)

• US Fed's Lacker to Speak (1315)

• US Fed's Plosser to Speak (1715)

• US Fed's Evans to Speak (1740)

• UK BOE's Bean to Speak (Sat. 0945)

Market Comment:

The SNB was out yesterday with a surprise 100 basis point cut that dropped their target rate by half. This sent CHF into a tailspin after it had finally shown signs of reversing a bit to the strong side yesterday after the recent meltdown in equities. We have been scratching our heads at the extended bout of CHF weakness despite weaker and weaker equity markets and a rather negative view on the events in Euro-land and perhaps grown a bit complacent in our CHF view, as we expected it to remain strong as long as equity markets were weak and risk appetite low. The UK Telegraph's Evans-Pritchard, one of the better market pundits out there over the last year, helps explain in an article this morning why the Swiss Franc has taken a dive. The BIS estimates that Swiss Banks have loaned some 50% of GDP to emerging markets - chiefly the Eastern European countries. With EM under so much pressure, it appears that the market is beginning to fret the risk of default and inability to repay outstanding debts - and this is weighing on the franc, with the shock SNB move a sign of near-desperation on the central bank's part.

Our default view has been that CHF would remain strong as long as risk aversion was on the agenda, but now we're wondering if this view is wrong due to the potential woes in the Swiss banking sector. That may be the new dominant theme compared to CHF's traditional safe haven status. We turn neutral on CHF here - and recognize the significant risk that CHF could go into a further sharp decline as market positioning might not be ready for an extension of CHF weakness. EURCHF is poised at its 55-day moving average around 1.5375 and GBPCHF is looking at its 21-day moving average here around 1.8250. If CHF depreciation is not stopped here, it may continue to crumble sharply. As a background note, it's very difficult to "choose your favorites" in an environment where every country has its own awful set of problems. It's one big "Least Ugly" contest out there...

The short term market focus on the US big three automakers reached a climax yesterday as at first it appeared that a deal had been struck, but then it emerged that no deal was imminent and that the automakers would be forced to submit business plans to congress by Dec. 2, after which a new vote on a potential $25 billion bridge loan would be made. Our view is that in the end, we will see the automakers bailed out one way or another, but the Congress is being far tougher on them than previously, and it remains to be seen whether they might be allowed to fall into Chapter 11 to ease pressure from creditors and allow for a reorganization. We seriously doubt that a total liquidation of these companies would be allowed to take place, though Chrysler may get absorbed by GM eventually. The car company focus had the USD back and forth all day, and the lack of a deal is seen for bearish CAD as automotive parts are one of Canada's key exports and risk of Detroit failure would weigh heavily on the loonie. USDCAD retested the 1.3000 level yesterday.

If feels like the currencies are decoupling somewhat from moves in equity markets after observing yesterday's action, in which JPY crosses were the only reliable movers in synch with equities - and even the JPY crosses didn't hold new lows convincingly. It feels like the market may be putting out feelers for a new theme and we turn a bit more cautious here until/unless the technical breakouts prove what the markets want to do. We find it significant that the tremendous input from government bond markets and equties (Dow slicing through 8000, etc...) has failed to generate a more convincing move in EURUSD. So let's see 1.2400/1.2330 fail in EURUSD and then we'll be more convinced that this stronger USD trend will continue in the short term.

Watch the economic calendar today for the preliminary readings of November European Services and Manufacturing PMIs for an indicator on how fast the EuroZone economy is decelerating. Yesterday, the US weekly jobless claims number reached a new high not seen since the early 1980's. There is no sign that the pressure will ease up and we wonder what the fate of many services jobs will be after what is likely to be a brutal Christmas shopping season in the US.

Chart: EURCHF

It seems that EURCHF is at a crossroads here at the 55-day SMA around 1.5380. Either the franc finds support here or the risk is that CHF sees a capitulation and unwinds even further toward perhaps 1.5800.

Published on  Fri, Nov 21 2008, 08:08 GMT