Swiss central bank may be intervening via FX options
HONG KONG (Reuters) – Switzerland’s central bank may be using currency options to reinforce its target of capping the franc at 1.20 per euro in what would mark an unusually aggressive step that carries considerable risk.
The Swiss National Bank may be selling options — in essence selling implied volatility — to help reinforce the 1.20 line in the sand set this week in a shock move to stop further franc gains, according to about 10 option traders at major banks in Asia and Europe.
Using derivatives would allow the central bank to leverage its balance sheet and give itself more firepower, underlining its pledge to use “unlimited quantities” of intervention to maintain the 1.20 level.
One trader said the SNB appears to be selling volatility through a forward volatility agreement, which allows the central bank to sell volatility, or vols, without specifying a strike price — such as 1.20 — in addition to selling basic options via one or more of the big Swiss banks.
The SNB has resorted to some of the most extreme tools available to a central bank — negative interest rates and now the potentially unlimited use of its franc printing press — in its aggressive effort to stem the franc’s damaging surge on the Swiss economy. The SNB declined to comment.
The franc has borne much of the pressure from market players reducing their exposure to the euro zone’s debt crisis and seeking safety in the Alpine nation’s economy, leading the currency to be massively over valued by most measures.
Acting directly in the currency options market could achieve two goals for the SNB.
Exclusive: Swiss central bank may be intervening via FX options
HONG KONG (Reuters) – Switzerland’s central bank may be using currency options to reinforce its target of capping the franc at 1.20 per euro in what would mark an unusually aggressive step that carries considerable risk.
The Swiss National Bank may be selling options — in essence selling implied volatility — to help reinforce the 1.20 line in the sand set this week in a shock move to stop further franc gains, according to about 10 option traders at major banks in Asia and Europe.
Using derivatives would allow the central bank to leverage its balance sheet and give itself more firepower, underlining its pledge to use “unlimited quantities” of intervention to maintain the 1.20 level.
One trader said the SNB appears to be selling volatility through a forward volatility agreement, which allows the central bank to sell volatility, or vols, without specifying a strike price — such as 1.20 — in addition to selling basic options via one or more of the big Swiss banks.
The SNB has resorted to some of the most extreme tools available to a central bank — negative interest rates and now the potentially unlimited use of its franc printing press — in its aggressive effort to stem the franc’s damaging surge on the Swiss economy. The SNB declined to comment.
The franc has borne much of the pressure from market players reducing their exposure to the euro zone’s debt crisis and seeking safety in the Alpine nation’s economy, leading the currency to be massively over valued by most measures.
Acting directly in the currency options market could achieve two goals for the SNB.
Big risks everywhere
The market volatility of the past two weeks has been astounding. While the broad factors are obvious, markets are not beasts that lend themselves to easy analysis and the nuances really matter here. A few broad factors at play are feeding off each other. All have been discussed and debated, but here’s a rundown on the interplay I see taking shape.
1) Euro breakup not so far-fetched
How do you hedge against the potential collapse of a single currency used in a $13 trillion economic zone plus trillions more of securities and derivatives? Not easily. A splintering or breakup of the euro has gone from unimaginable to a risk that can’t be ignored altogether. Europe’s inability to get ahead of the crisis now means a sovereign debt crisis is fast becoming a banking one. The solutions — a super sized EFSF rescue fund, Eurobonds, a commitment to fiscal union — are there to be had. But the political will is lacking.
Back to the hedging. The options market is the obvious place to turn, especially deep out-of-the-money options that typically mean you don’t have to pay a lot upfront to protect against a doomsday scenario. For the euro, this has been most apparent in the euro/Swiss franc FX options market where the hedging for downside protection against the euro has been intense. The extreme implied vol skew towards EUR/CHF puts reflects big demand for such protection. The Swiss franc is bearing the brunt of the selling not just because of the franc’s perceived safe-haven status, but also because Asian central bank diversification of dollar holdings has kept euro/dollar surprisingly high for all the single currency’s worries. (So in some ways, the Swiss National Bank can blame its counterparts in Asia for making the pressure on the franc so acute. ) The franc is the Alpine haven as the European project threatens to tear apart at the seems, and the SNB’s attempts to get extremely unconventional in fighting this battle — flooding liquidity and creating negative short-term interest rates — are only partially working. The below surface now shows more demand for short-term EUR/CHF calls in case the SNB succeeds, but the steep skew towards out-of-the-money puts is one of the best gauges for showing the extreme nervousness over what the endgame really is in Europe. When the skew starts to normalize, then the market may be convinced that Europe is getting a handle on this crisis. We are far from that point.
2) U.S. GDP shock, G7 stagnation and tightening fiscal policy
The debate over the S&P downgrade of the USA’s AAA rating masked the bigger even that occurred at about the same time — the shock downward revisions to U.S. GDP. By showing a much weaker recovery coming out of the crisis, the revisions overturned many growth assumptions that fed into many other forecasts made by funds, from interest rates to earnings. That is the main reason why the stock market reaction was so big: what looked like a relatively healthy recovery was a mirage, and the data pointed to stagnation and a higher risk of a double-dip recession ahead. Earnings expectations were the most at risk from such major revisions, and that’s why consumer and technology related stocks were the most hit in the initial selloff. At this point, the share slide has helped better align prices with expectations for earnings. But the downgrade to earnings is only just kicking in. This wholesale reassessment may have more room to run, and in the process drag shares down further. In historical and forward p/e ratios, the denominator will be falling as fast as the numerator.
Dollar funding costs rise as European crisis rages
HONG KONG, Aug 5 (Reuters) – Dollar funding costs edged up in Asia on Friday as banks hunkered down during one of the worst stock market sell-offs since the financial crisis, with investors dumping risky assets on fears the raging euro zone crisis will compound a global economic slowdown.
Front month Eurodollar futures dipped on expectations that three-month LIBOR would be set higher later in the day, but traders said the dollar markets were holding up thanks to ample liquidity from banks’ huge excess reserves held at the Federal Reserve.
“I wouldn’t say there is a rush for dollars,” said the head of money market trading at a European bank in Singapore. “The traditional hedges against a blow-up haven’t paid out.”
Asian markets saw some slight deterioration in cross-currency basis spreads as the premium for obtaining dollar funding rose, but the moves were minor compared to the shocks seen during the worst days of the 2007-08 financial crisis.
Australia’s central bank said in a quarterly statement that the sovereign debt problems in the United States and Europe could be disruptive enough to a sharp rise in global risk aversion, prompting it to refrain from raising rates until the uncertainty died down.
Still, the Reserve Bank of Australia also said that credit markets have been relatively unaffected by the global turmoil and reiterated its upbeat outlook for the resources sector.
European money markets have been at the heart of the deterioration this week as a plunge in financial shares, especially in Italy, has caused more investors to cut their exposures to troubled euro zone countries across the board.
Bonds drop, but debt deal adds to economy worries
HONG KONG (Reuters) – U.S. Treasury futures fell from an eight-month high on Monday after Republicans and Democrats thrashed out a compromise on cutting the budget deficit and raising the debt ceiling, although the slash in spending is seen adding to the headwinds facing an already weak economy.
Market players were now waiting to see if both houses of Congress would pass the deal and send to President Obama for his signature before Tuesday’s deadline for when the Treasury would default, though comments from lawmakers suggested the deal would pass.
Asian shares jumped on the news, with the broad MSCI regional index gaining nearly 2 percent and S&P e-mini futures up 1.5 percent on a relief rally. Other safe havens, such as the Swiss franc and gold, also lost ground.
The debt agreement — a two-step process to cut $2.4 trillion of the next 10 years — overshadowed China’s official PMI showing factory growth slipping to a 28-month low in July.
The focus is now shifting to the economy’s troubles after second-quarter GDP data last week showed the expansion much weaker than expected over the past few quarters and coming out of the crisis, raising fears that growth is closer to stall speed.
The surprisingly grim GDP data sparked a sharp drop in Treasury yields along the curve, on top of the worries about the debt ceiling showdown and a potential delay in the Treasury’s quarter refunding auctions set to be announced this week.
Friday’s drop in yields suggested that investors remained more fixed on the economic outlook, and even a cut in the United States’ top AAA rating would reverse the drop in yields.
Aussie and NZ eye rate hikes, Europe strains surface
HONG KONG, July 28 (Reuters) – Australian and New Zealand swap rates jumped on Thursday as both central banks were expected to pull the trigger on higher interest rates in coming months, even as market players kept an eye on a flare-up of strains in European banking system.
Two-year New Zealand rates soared to a seven-month high of 3.93 percent, nearly back to where they were before the Christchurch earthquake in February, as investors see the country’s central bank lifting policy rates back to 3 percent in September and higher in 2012.
Short-term rates in New Zealand are now pricing in a 96 percent chance of a quarter-point hike in September and about 100 bps of rate hikes over the next year.
Some analysts said the market was already fully pricing in likely policy tightening from the RBNZ, and thus short-term rates may peak out unless households begin to shift towards fixed-rate mortgages from floating-rate mortgages.
In the past such a shift has forced banks to hedge their books by doing heavy paying in swaps, driving rates higher.
“We are wary about the prospect of mortgage flows putting further upward pressure on short rates,” said David Plank, interest-rate strategist at Deutsche Bank in Wellington.
Aussie two-year swap rates also climbed further after the quarterly CPI report the previous day squashed some expectations the Reserve Bank of Australia could reverse gear and cut rates. The two-years have risen 30 bps in less than two weeks.
Asia shares jump, dollar slides on US debt woes
HONG KONG, July 26 (Reuters) – Asian shares rebounded on Tuesday as upbeat earnings lured buyers, but the dollar slid to a record low against the Swiss franc after a speech by U.S. President Barack Obama gave no sign that a deadlock in Washington over raising the debt limit was easing.
European and U.S. stocks were primed for gains, with futures on the Dow Jones Eurostoxxe 50 STXEc1 flat in early trade and S&P e-mini futures ESv1 rising 0.2 percent.
Short-term speculators took aim at the dollar after Obama delivered a prime-time address to Americans, warning that a default on U.S. bond obligations would be a “reckless and irresponsible outcome”. But he gave no indication a compromise was imminent.
So far investors have shown few signs of panic even as Republicans and Democrats have failed to bridge their differences with just a week to go to the Aug. 2 deadline that the U.S. Treasury has set for when it may fail to pay out on Treasuries.
The market reaction to a sudden breakdown in talks over the weekend was limited given the threat of a technical default and a potential cut in the United States’ top-notch AAA credit rating.
But some market players were taking no chances, shifting funds into safe-haven gold and the Swiss franc, driving both to record highs in U.S. dollar terms. Gold was steady in early trade at $1,614.60 an ounce.
Portfolio managers and traders have said they believe an agreement will be reached in Washington at the last minute, and that even a technical default or rating downgrade may only cause short-term market volatility rather than a full-fledged crisis.
Asia shares up, no signs of panic over U.S. debt deadlock
HONG KONG, July 26 (Reuters) – Asian shares edged higher on Tuesday, rebounding from Monday’s fall, but the dollar slid to a record low against the Swiss franc after a speech by U.S. President Barack Obama gave no sign a deadlock in Washington over raising the debt limit was easing.
Short-term speculators took aim at the dollar after Obama delivered a prime-time address to Americans, warning that a default on U.S. bond obligations would be a “reckless and irresponsible outcome”. But he gave no indication a compromise was imminent.
So far investors have shown few signs of panic even as Republicans and Democrats have failed to bridge their differences with just a week to go to the Aug. 2 deadline the U.S. Treasury has set for when it may fail to pay out on Treasuries.
The market reaction to a sudden breakdown in talks over the weekend was limited given the threat of a technical default and a potential cut in the United States’ top-notch AAA credit rating.
But some market players were taking no chances, shifting funds into safe-haven gold and the Swiss franc, driving both to record highs in U.S. dollar terms. Gold was steady in early trade at $1,614.14 an ounce.
“The unfolding U.S. debt ceiling drama should add to the headwinds for market risk sentiment, with a potential downgrade of the world’s ultimate risk-free asset – the U.S. Treasuries – fuelling more flight to quality into gold and Swiss franc,” said currency analysts at Citigroup in a note to clients.
Portfolio managers and traders have said they believe an agreement will be reached in Washington at the last minute, and that even a technical default or rating downgrade may only cause short-term market volatility rather than a full-fledged crisis.
Asia shares up, investors calm on U.S. debt
HONG KONG (Reuters) – Asian shares edged higher on Tuesday, bouncing back from a slide the previous day, after U.S. stocks posted only modest losses in reaction to the worsening deadlock in Washington over raising the debt limit and avoiding a technical bond default.
The dollar fell to a record low against the safe-haven Swiss franc in early trade as President Barack Obama delivered a prime-time address to Americans, warning that a default on U.S. bond obligations would be a “reckless and irresponsible outcome.
Investors have showed few signs of panic even as Republicans and Democrats have failed to bridge their differences with just a week to go to the August 2 deadline the U.S. Treasury has set for when it may fail to pay out on Treasuries.
The market reaction to a sudden breakdown in talks over the weekend was relatively mild and limited given the threat of a technical default and a potential cut in the United States’ top-notch AAA credit rating.
The S&P 500 .SPX shed 0.6 percent by the end of Monday, but U.S. stock futures had been down 1 percent earlier in the day.
Some market players were taking no chances, shifting funds into safe-haven gold and the Swiss franc — driving both to record peaks against the U.S. dollar. Gold was steady in early trade at $1,613.50 an ounce.
“The unfolding US debt ceiling drama should add to the headwinds for market risk sentiment, with a potential downgrade of the world’s ultimate risk-free asset – the US Treasuries – fuelling more flight to quality into gold and Swiss franc,” said currency analysts at Citigroup in a note to clients.
Asia shares up, investors calm on US debt deadlock
HONG KONG, July 26 (Reuters) – Asian shares edged higher on Tuesday, bouncing back from a slide the previous day, after U.S. stocks posted only modest losses in reaction to the worsening deadlock in Washington over raising the debt limit and avoiding a technical bond default.
The dollar fell to a record low against the safe-haven Swiss franc in early trade as President Barack Obama delivered a prime-time address to Americans, warning that a default on U.S. bond obligations would be a “reckless and irresponsible outcome.”
Investors have showed few signs of panic even as Republicans and Democrats have failed to bridge their differences with just a week to go to the Aug. 2 deadline the U.S. Treasury has set for when it may fail to pay out on Treasuries.
The market reaction to a sudden breakdown in talks over the weekend was relatively mild and limited given the threat of a technical default and a potential cut in the United States’ top-notch AAA credit rating.
The S&P 500 shed 0.6 percent by the end of Monday, but U.S. stock futures had been down 1 percent earlier in the day.
Some market players were taking no chances, shifting funds into safe-haven gold and the Swiss franc — driving both to record peaks against the U.S. dollar. Gold was steady in early trade at $1,613.50 an ounce.
“The unfolding US debt ceiling drama should add to the headwinds for market risk sentiment, with a potential downgrade of the world’s ultimate risk-free asset – the US Treasuries - fuelling more flight to quality into gold and Swiss franc,” said currency analysts at Citigroup in a note to clients.
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