Underwhelming Policy Response Continues

BBH CurrencyView

• Markets stable but tone remains fragile.
• SNB expanded its sight deposit target; no EUR/CHF peg.
• BoE’s decision to stay on hold was unanimous.
• New measures announced by China boost CNY internationalization and integration with HK.

Global capital markets may be more stable than a week ago, but the tone remains fragile. Asia equities reversed earlier losses and the MSCI Asia Pacific rose about 0.5%, for the third consecutive gain. Of note, foreign investors were net buyers of Philippine shares for the first time since Aug 3. European bourses mostly lower as yesterday’s poor GDP data weighs on sentiment. Financials are under pressure, but the technology sector even more so. Core sovereign bond markets are steady to higher. UK gilts are outperformers following a worse than expected employment report and news that for the BOE’s decision to keep rate on hold earlier this month was a unanimous decision, the first since May 2010, as both members calling for a hike, Dale and Weale joined the majority.

There are three main talking points today: the SNB’s decision to expand current measures to stem the franc’s appreciation, the UK employment report and BOE minutes, and new initiatives by China, which among other things will allow more offshore yuan (CNH) to be invested onshore.

The Swiss National Bank expanded its sight deposit target from CHF120 bln to CHF200 bln. Recall that at the start of the month the target was CHF30 bln. The SNB also would continue to repurchase its outstanding bills and continue to use currency swaps. The euro peaked prior to this announcement near CHF1.1550, from CHF1.0075 early last week. There was some disappointment that the SNB did not adopt stronger measures and this saw the euro drop around CHF1.1220 before talk of SNB intervention in the forward market, lifted the euro about 1% off the those lows by midday in London. Press reports suggest the Swiss government will announce aid to Swiss companies, hurt by the marked appreciation of the franc, to the tune of around CHF1.3 bln. The US dollar has tested the CHF0.80 resistance area each day this week and failed to establish a beachhead. Initial support seen around Monday’s low near CHF.0.7740. In many ways the SNB decision, like the outcome of the Paris-Berlin summit yesterday, and the US debt ceiling debate, officials a consistently underwhelming the market (though additional SNB measures may be forthcoming).

The unanimous decision by the BoE to leave rates on hold earlier this month is not much of a surprise. Most expected at least one, if not both, of the recent votes to remove some monetary stimulus would have been swayed by the disappointing string of economic data. The vote of course was before today’s employment data, which was considerably worse than expected. The 37.1k increase in the claimant count was the largest since May 2009 and the unemployment rate rose to 4.9% from an upwardly revised 4.8% in June (initially 4.7%). The claimant count also was revised sharply in June from 24.5k to 31.3k. While gilts have outperformed, sterling remains confined to yesterday’s range against the dollar. The euro has held the lower end of its 5-day range near GBP0.8730 and is testing the GBP0.8800 area. It may struggle to sustain gains above there today.

UK China announced fresh steps to bolster the internationalization of the yuan and promote Hong Kong as the offshore trade center. The most important step for international investors is that officials will give foreign investors more ways to invest in mainland stocks and bonds. The Vice Premier of China Li Keqiang, tipped to be the next premier, indicated that RQFII, which allows the offshore yuan (CNH) to invest in onshore bonds and stocks (CNY), may be expanded shortly. The liberalization will allow the purchase of up to CNY20 bln (~$3.1 bln) of onshore financial instruments. Separately, for the first time in six sessions, the yuan was fixed weaker, leading to the largest drop in the yuan in a few months, albeit within its narrow range.

The funding strain for European banks is evident in a number of ways, including borrowings from the ECB, some of which are used to secure dollar funding, hence the rise in the basis swap, for example. Today the ECB reported that for the first time in six months, there was an interested party for its weekly dollar auction. The ECB said a euro-area bank borrowed $500 mln from its 7-day operation at a fixed rate of 1.1% One week LIBOR is around 21 bp. Although one bank does not make a trend, the dollar auctions, provided by swap lines with the Fed, may be worth monitoring.