Is the SNB front running the ECB?
The SNB is cutting the sight deposit rate Jan 22nd. The ECB’s next meeting is Jan 22nd. Coincidence or a big fat signal?
It looks like the SNB have had enough of seeing the price a few pips off of the cap and economic risks increase and have acted. They constantly have the Sword of Damocles hanging over them from ECB easing and QE would have made it a very tough fight and potentially would have cost them a lot of money intervening. Whether the SNB know something about the ECB that we don’t is unknown but it is very suspicious that they’ve picked that day to bring in the negative rate. At the very least I’d say they are being pre-emptive rather than have been given the nod by the ECB.
Let’s get one thing clear though, they have not intervened to give us retail traders a holiday bonus. What they have possibly done is relieve the pressure from whoever has continually been selling the pair. Has it worked? I suspect that if there are chunky shorts then it would take a flush of 1.21 to shake them out and the protection of 1.21 looks telling. Of course, there are plenty of longs who would have taken profits after sitting in longs for quite some time with many eyeing the 1.21 level over the Gold vote. Maybe the time of year was taken into consideration and they didn’t want to have the price so close to the cap over one of the most illiquid times of the year with offices shut and skeletal staff in the rest.
Wondering the SNB what, why and how is not really important, working out what happens now in the currency is.
Price action will be key. It looks like we’ve had the spike and a lot of longs are now out. There also doesn’t seem to be much action in buying the fall back, which again could be traders not willing to load up again this side of the holidays.
The next factor to look at is where will the sight deposits go if the banks decide to place deposits elsewhere? Firstly there may not be a big shift in funds by Swiss banks as they are bound by minimum reserve requirements which are in sight accounts. That’s why the SNB gave them as 20x threshold of those reserves. For everyone else (except domestic authorities, the confederation and associated enterprises) the negative rate will apply to all balances over CHF10m.
So where will the money flow, if it does at all?
Into Europe? Probably not on deposit but there’s is still a decent yield in bonds, compared to rates on central bank deposits.
For better yields AUD and NZD could be a good destination but obviously come with the currency risk and risk is not really what banks do with these types of deposits.
The long and short is that we may not see too great an effect from this SNB move. The sums involved aren’t likely to see 200-300 pip moves in swiss pairs as money goes flowing out of Switzerland. As I said earlier we may have a bit more two way action from here for a while but the ECB’s next meeting could be a big event for both Europe and Switzerland.
As for the retirement trade, I unloaded some and even managed to get a short on for a few pips but I’m still happy to be long and wait it out. The SNB have acted and that should be a strong message to any doubters.
Update: Our friend George Dorgan at SNBCHF.com has also given his thoughts on today’s move. He’s been a bit more blunt than me and he’s also given some good insight into the numbers involved with deposits. Pretty handy really as I was just about to email him asking his view. I’ll keep my powder dry for another time
You can read his article here and there’s a link in the comments too.