Euro-zone, UK, Switzerland and Japan Talking Points

The price action in the foreign exchange market has been particularly choppy. The last three weeks the euro has finished near $1.3500. Within that time, it traded between roughly $1.3285 and $1.3690. As I write this, it is trading almost smack in the middle of the range. While the market appears to have priced in the Greek developments, the situation remains fluid. Most reports seem to agree that Greece’s tax increases, spending cuts and other reforms, assuming that they are on track and the next formal report is due in mid-May, are sufficient to draw on the backstop facility already announced.

At the same time, reports warn of continued reluctance in Germany, with the parliamentary floor leader for the government coalition quoted opposing “rushed approval”. What seems to be the main focus the EU/ECB/IMF talks are the conditions Greece needs to meet to get funding beyond the first year. Moreover, with contagion clearly beginning to hit Portugal, the need for preemptive and bold action, larger than just the Greece situation appears beyond the reach and/vision of European officials. This general backdrop is a weight on the euro.

The Swiss National Bank for one has been buying euros. The reserve figures from Q1 show euro holdings rose to 56.4 bln from 37 bln at the end of 2009. Dollar holdings actually fell to 26.1 bln from 27.6 bln. Sterling holdings edged higher to 2.91 bln from 3.10 bln. Most surprisingly the SNB’s yen holdings rose from 453.3 bln to 714.5 bln.

There are a take aways from this data. First during the quarter the market suspected intervention only once and that was in early Feb. The actual data suggest intervention has been much more than the market suspected (subjective assessment, as there are no formal surveys of expectations). Second, the fact that the Swiss franc generally drifted higher against the euro until accelerating in near the Ides of March may point to the intervention having slowed. However, what seems to have been a large operation on 1 April suggests that if the SNB pulled back it will still act in the face of a sharp CHF gain.

Thirdly, it suggests the underlying demand for Swiss francs may be greater than the market appreciates. On its face, there would seem to be two likely sources. The first are foreign sources, such as investors that have liabilities in Swiss francs, such as eastern and central Europe come to mind. Some observers also posit the some high net worth funds are moving back to the secrecy/security of Swiss banks. The second source of demand for Swiss francs may be coming from the Swiss themselves. There ahs been steady talk of Swiss investment banks repatriating funds. All this points to risk of renewed appreciation of the franc. .Watch the CHF1.4300 area, which has been the lowest since the intervention at the start of the month.

The UK reported a better than expected employment report. While this is no doubt good economic news, it is not clear that it will have much impact on the tight election race. The unemployment queues shrank by 33k. This is three times more than the market had expected. And the decline in Feb increased by a quarter to 40k from 32k. On top of that, average week earnings (3-month year-over-year) rose to 2.3% from 0.8% in Jan (reported with a one month lag). Sterling, already bid before the news, extended its gains, but appears to have run out of steam after marginally taking out yesterday’s high. With the upper end of the recent range at $1.55 and momentum fading, the risk is for a heaving bound during North America today. Support is seen near $1.5320-50.

Meanwhile the latest polls point to hung parliament, but perhaps more revealing, a new wires report indicates that the betting may have shifted at the bookmakers—betting houses. Until the first TV debate (next one tomorrow night), the bets were coming in favoring an outright victory for the Conservatives, who peaked with a 58% chance. Now the same odds are at 35%. As we noted yesterday, the rise of the Lib-Dems makes the Conservative challenge all the more difficult. At the same time, the rise of the Lib Dems will bring them and their candidates under closer scrutiny and as the debate turns to foreign policy, the near-term risk would seem that Lib-Dem’s Clegg’s inexperience may become more relevant.

Germany has revised up its GDP forecasts and Japan’s Ministry of Finance has raised its outlook for the first time in six months. The German government raised next year’s GDP forecast to 1.6% form 1.4% this year. It is pinning its hopes on investment spending. Consumption is expected to be a drag on GDP this year, even though it is optimistic on the labor market (thought he short-term work program was extended until March 2012).

The improved assessment by Japan’s MOF, follows an upgrade of the BOJ’s assessment earlier this month. The real problem of deflation, however, continues to vex policy makers. The dollar made a new marginal high against the yen, but appears to be fading. Resistance is seen in the JPY93.40-60 area. Support now JPY92.40.