The latest weekly Swiss National Bank sight deposit data sent an interesting signal in that the SNB’s holdings actually dropped, and by the most since it created these sight deposits as a means to fight CHF strength. The last time there was a significant drop in the deposits was just before and especially after the SNB’s surprise June rate hike that set in motion the significant CHF rally that took EURCHF from 1.0400 to well below parity in a few short weeks. Falling sight deposits suggest that the SNB is happy to buy CHF and sell foreign FX to keep the CHF on the stronger side of where it would otherwise trade. Perhaps the SNB would like to mix in some heavy reserve management to fight inflation with intervention and unwinding a portion of its gargantuan reserves rather than tracking the panicky pace of policy tightening elsewhere? The overnight action in EURCHF looks more linked with sterling’s woes, but USDCHF is trading up at interesting levels, clearing the range highs since July and eyeing parity soon after pulling above 0.9900 this morning.
Let’s have a look at the US 2-year treasury auction later today. For savers, shorter dated treasuries offer significant yield now, of course only really attractive if inflation moderates, but the current 4.25% yield offers solid yield and little duration risk. The last auction on August 23 saw middling demand when the 2-year yield was about 100 basis points lower.
And let’s also have a look at how China responds to USDCNH hitting new all-time highs above 7.20 after trading as high as 7.168 today. But the most pressure in Asia is on USDJPY after a Kuroda speech today brought nothing new to the table other than his justification for intervention. Don’t look now, but USDJPY is pulling back well above 144.00 in today’s trade. After all, US yields are trading well above their levels when USDJPY first nearly hit 145 more than two weeks ago (key US 10-year benchmark then was some fifty basis point below the current 3.78%. Expect the market to challenge the BoJ/MoF soon if yields stay up here or higher.
Italy’s election saw little market response and the right parties performed a bit weaker than the polls in aggregate at 43%, even if coming PM Giorgia Meloni’s Brothers of Italy party did well at 25% of the popular vote. The vote total does not offer an overwhelming mandate. As the new administration finds its feet, one key angle will be whether Meloni succeeds in rolling back some of the reform measures passed by Draghi as she has vowed to do. These reforms were part of the terms for Italy accessing the eventual EU pandemic recovery budget of EUR 200 billion for the country.
Table: FX Board of G10 and CNH trend evolution and strength.
The USD strength reading is getting to unsustainable levels beyond the nearest term with its current reading above 8, but given the connection with spiraling sentiment, could yet end in a further climax before reversing. GBP is in a deep funk now, falling at a rate that will likely elicit a BoE response soon. NOK is also very weak on the Norges Bank’s curiously dovish guidance and crude oil prices getting pummeled.