Where did all the Euro’s go… (graph)
from Erwan Mahe (guest post)
For the time being I am not commenting on the various bail-out plans in the works (Spain, banking union plan, etc.), not only because of the lack of any officially confirmed details, but because the media is already saturated the topic, especially on the crucial point of the terrible Greek PSI mistake, subordination. The real sticking point for everyone today is the synchronous and atypical downward movement in all euro-denominated assets, be they eurozone government debt instruments or stock markets. This is not our usual flight to quality either, since the Bund has been declining in line with “Bonos”, OATs” and other debt instruments. Even the 2-year Schatz has lost ground, as the price shed some 10 cents in the course of the day while the yield climbed 9.5 bps. Remember, it was trading in negative territory just a few days ago!
But strangely, the euro has not budged, given that it is still trading at 1.25 vis-à-vis the USD at the end of the day’s trading. Unless they held onto the sales proceeds of these sight deposit assets in their banks (unlikely in the current situation), investors who sold euro-denominated assets during the day should have logically converted to another currency. However, the euro/yen exchange rate has remained stable, at about 99.40. After doing a little digging, I think I have solved the mystery. After all, there is one currency towards which all these euro sellers can go without affecting in the slightest its exchange rate: the Swiss franc!
That’s right: The SNB continues to defend, cost what it may, its floor of € 1.20 CHF and is buying whatever quantity of other European currencies presented to it. Currency inflows do not affect it and are not visible in its exchange rates. The rumour is that the SNB uses a AAA-rated Dutch bank as is intermediary on this market and even intervenes at a fraction above the floor, at around 1.2010. The latest published statistics reveal a CHF 66 billion hike in its currency reserves just for the month of May to CHF 304 billion, thus highlighting the magnitude of its recent operations. I bet that the first half of June will show at least the same level of interventions. But these operations data are not available on a daily basis, so we need to look for clues elsewhere. And what better field of discoveries than the yield curves of Swish government debt instruments? I have prepared for you a simple graph incorporating these data, which speak for themselves.
For the first time in the history of Switzerland, rates on 5-year debt fell into negative territory today!
The entire short end of the curve is falling toward heretofore unknown rate levels, which makes Switzerland a Keynesian paradise: the more the government borrows, the low its debt load! We could probably link these incredible flows with the comments made by an “anonymous” European Union source, who said yesterday that, “capital control” plans were being examined to prepare for a possible Greek exit from the eurozone, including, among other measures, a limit on withdrawals from ATMs. If that’s the case, one saying comes to mind: Be brave, let’s get out of here!