It’s All About the Benjamins

by CC August 4, 2011 10:44 am • Commentary

Some interesting moves in global currencies today as several players around the world have made interventionist moves. First, the Swiss:

The Swiss National Bank took the market by surprise by announcing what amounts to another version of quantitative easing.  Its first attempt was via foreign bond purchases and sales of Swiss franc for euro and dollars.  It failed miserably and leaving the august institution with significant paper losses.

This new attempt includes: 1) a formal adoption of a near-zero interest rate policy, 2) a cessation of renewing maturing repos and SNB bills, while actively repurchasing bills, to achieve 3) a substantial increase in sight deposits to CHF80 bln from CHF30 bln.  In June, repos and bills outstanding stood near CHF25 bln and CHF107 bln respectively.  This leaves it plenty of room, if needed to overshoot its CHF80 bln to the upside, indicating some ability to scale today’s policy response to what by all metrics is a terribly over-valued Swiss franc.

Alot of currency traders yesterday figured that this move by the Swiss could force the Bank of Japan into a similar move, ant today it did:

The yen dropped by the most since October 2008 against the dollar after Japan sold its currency to stem gains that threaten the nation’s economic recovery.

The yen’s intraday decline surpassed the 3.93 percent drop at the previous intervention on March 18. The Bank of Japan followed its Swiss counterpart in easing monetary policy, with Finance Minister Yoshihiko Noda saying the action was unilateral. Group of Seven nations jointly sold the yen in March. The euro weakened against the dollar after European Central Bank President Jean-Claude Trichet said policy makers will conduct a special liquidity operation to counter tensions in the region’s financial markets.

So what does this mean for the dollar? Near term this is positive for the dollar’s relative strength. The dollar is moving higher against those currencies today:




This plays out well for the FXE trade mentioned on the site. The thing to watch out for, and possibly the reason why FXE hasn’t completely broken down by now is the thinking that the economic weakness in the US as shown by recent data may force the Fed to act again. A QE 3 move.

The Fed meets August 9th, and any move by them could be telegraphed on or before that date.

Dan’s FXE Trade Management: As for managing this trade, with the stock through the strike that I am long we will need some time for this to play out and settle in somewhere between 142 and 140.  If this happens in the next couple days before the FOMC meeting I will likely take what profits I have and move on as the risk to a bounce in the Euro vs the Dollar outweigh the potential to realize the maximum potential of the fly.