The major early action involved reportedly large-scale selling intervention of the Swiss franc by the Swiss National Bank and agents apparently including the BIS in Basle. The scope of the selling which saw the dollar rally from Chf1.0650 to Chf1.0920 in the space of a few minutes accompanied a movement against the euro from Chf1.5012 to Chf1.5287 as the Swiss authorities came good on a call to weaken its currency on behalf of its struggling manufacturing sector. As we noted at the time of last week’s comments from a double-act at the SNB, the trade remains to stay long the Swiss – except on days such as this!
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The early New York time intervention created a busy start for traders States side. Earlier an OECD report revised March predictions for a 4.3% growth contraction among its 30-members to a 4.1% contraction. In addition growth in 2010 is revised higher to 0.7% from 0.1%. The revision s based on the observation that activity in the U.S. appears to have bottomed out although it warns that recovery is likely to take a long time with economies meanwhile remaining fragile.
On interest rates the OECD says that the sluggish nature of the recovery means that the Fed can afford to leave policy settings alone until 2011. This meshes nicely with commentary from the Financial Times today as they preview what the FOMC might announce in its policy statement this afternoon. According to its article the regional presidents are wary about the stance of governors who feel that the enormous degree of slack in the economy, i.e. idle resources, will prevent any kind of budding inflationary pressures.
Elsewhere the OECD appeals to the better nature of the ECB to use weak inflationary pressures to further reduce monetary policy below its current 1% stance. Doubtless this appeal will fall on deaf ears and the fact that the euro has failed to retreat much against the dollar today at $1.4016 tends to prompt us to say that the market doesn’t expect the ECB to listen much either.
The OECD also prompted more central banks to follow the lead shown by the U.S. is administering more stress tests across banking systems. It urged that the results should be made public and that where necessary further recapitalization should take place.
The more upbeat tone from the OECD report has, at the margin, helped risk appetite this morning. The dollar is broadly lower although is making gains against the Japanese yen, which might be expected if carry trades are suddenly back in vogue. The dollar today buys ¥95.47.
Elsewhere the pound is stronger. So far this year there has been a positive relationship between the performance of banking shares and that of the pound sterling. Today banking stocks rose 1.3% while the pound has recovered much of its lost ground versus the dollar of this week. The pound is trading at $1.6502. We noted yesterday that a BoE economist appeared to endorse the strategy of buying U.K. government debt from overseas investors and effectively lowering the exchange rate, which helps channel demand in favor of Britain. While not quite the flipside of the same coin, today the news is that confidence in British fiscal and monetary policy is played out by overseas demand for stocks in the financial sector.
In the Eurozone, the ECB accepted bids from all 1121 banks that applied for unlimited amounts of 12-month money at a rate of 1% today. Cash will be dispersed tomorrow and we wait to see what impact this might have at the front of the curve where in theory at least pressure will be reduced on shorter dated loan rates out to one-month.
