What are They Thinking?

In recent days, policy makers have been most noticeable by their absence. This absence has weakened their credibility and encouraging speculative attention.

The recent string of questionable tactical moves began last week when the Swiss National Bank was unable to prevent a breech of the euro/Swiss floor of 1.20. A modest change in tactics could have prevented this, even if the price action was the result of a idiosyncratic credit issue. Borrowing a military tactic, the SNB could have had a forward defense. That is to say to provide a greater likelihood that the CHF1.20 level would remain intact, it could have chosen to have its large orders (rumored to be measured in billions) to be placed say CHF1.2020, rather than CHF1.20.

This has resulted in the flattish bounce in the euro. The SNB's words and deed have managed only to lift the euro to CHF1.2025-30, hardly convincing. Last fall when the euro was closer to CHF1.24, we argued against the likelihood of the SNB raising the floor to CHF1.25 which was rumored at the time on a cost/benefit basis. However, now with the euro at CHF1.20, the new head of the SNB could underscore his resolve by raising the floor to CHF1.25. This would no doubt please many domestic constituencies and would be another way to rebuild the credibility.

The absence of the ECB from purchasing Spanish (and Italian bonds) seems also like a tactically questionable move. Although no advertised as such, the LTROs have seemed to replaced the sovereign and the covered bond purchase program. Yet there is no reason why this has to be the case.

Indeed, the new French ECB board member Coeure opined that 1) market conditions are not warranted and 2) the SMP program still exists even if not used recently.

Coeure heads up the ECB's market operation division, but resuming SMP would not be simply his call. The ECB has not bought sovereign bonds for four weeks. German opposition, which led to two members resigning from the ECB (Weber and Stark). In fact, Weber's resignation ultimately paved the way for Draghi's candidacy and it was Draghi that innovated with the 3-year LTROs.

Some observers have read Coeure's remarks as a threat of SMP. This is one of the factors behind the rally in Spanish and Italian bonds today. That this is not reflected in the CDS market would lend credence to hypothesis that Coeure's remarks are an important market factor today.

The third possible tactical faux pas may be from the Japanese finance minister who was explicitly not very disturbed by the yen's strength. The issue lies not in the sentiment, but the vocalization of it. Would it not have been preferable, tactically speaking, for Azumi to pursue "strategic ambiguity" and simply noted that Japanese officials are always watching with interest developments in the foreign exchange market ?

The yen has strengthened about 4.3% against the dollar since mid-March and a little more than 5.1% against the euro since the start of the month. At today's best yen level, it was back to late Feb lows against both the dollar and euro. The reversal of the yen's fortunes is evident too on the Nikkei which has slid 8.5% since March 27th.

Azumi appears to have gotten a little lucky today which has a bit of a corrective feel. Ye the dollar and euro's recovery against the yen is not very inspiring and could quickly reverse.