The Drawer Labeled “Things I Don’t Understand”

The dust is settling after yesterday’s big central bank day with most major market prices left in well-established ranges. Things have the distinct whiff of summer; market liquidity is waning, Wimbledon tennis is on in the background, and the rain clouds are starting to roll in.

Yesterday’s ECB tender came in somewhat to the high side of expectations (though well below some of the speculative figures that had been floated) at €442 billion. Cash rates have fallen sharply, and the Sep Euribor contract is now coming close to pricing the 3 month interbank rate below the ECB policy rate.

This, combined with much better than expected durable goods figures, helped prompt equities higher aheaad of yesterday’s Fed announcement. (Nothing to see here in new home sales, move along, move along.)

The five year auction was a strong one, with am solid bid to cover, short tail, and solid participation from indirects. This gave US fixed income a bit of a fillip, which somehow morphed into a melt-up in the few minutes before the Fed announcement. The timing of the rally was peculiar, to say the least.

And when the Fed came out and promised to keep rates ultra-low for an “extended” period (which sounds to Macro Man’s ear like it is longer than than the 10.5 month “considerable” period of 2003-04), it appeared to validate the rally, in the white eurodollars at least.

Yet the ommission of any reference to the threat o corrosive deflation was taken as a hawkish comment, and bonds and eurodollars swiftly gapped lower. Neither have traded back to their 7.14 pm London levels.

Yet stocks have shrugged off this “hawkishness”, when one might reasonably consider that they should be among the most affected by the absence of any further Fed lovin’. Indeed, Spoos are now trading above their pre-Fed levels….not exactly what you’d expect from a “hawkish” statement!

It’s safe to say that the drawer labeled “things I understand” is rapidly emptying. Indeed, when Macro Man checked this morning, the sole content of the drawer was a piece of paper bearing the phrase “don’t trade EUR/USD”.

Indeed, that was the lesson learned from the real central bank fireworks yesterday, courtesy of Macro Man’s buddies at the SNB. He somehow missed the appointment of Rip Van Winkle to the SNB board (perhaps it happened in 1988?), but the Swiss roused from their slumber with a vengeance yesterday, hoovering aggressive amounts of USD/CHF. This in turn helped submarine the nascent rally in the euro, sending us careening back to the well-trodden territory of the a 1.39 handle.

One thing that Macro Man pretty clearly doesn’t udnerstand is the SNB’s decision-making process in determining the timing of their intervention. Perhaps he should shave with Occam’s razor; maybe it really was as simple as a defense of 1.50 in EUR/CHF.

That, of course, begs the question of why the SNB chose to intervene primarily in USD/CHF. There is one school of thought that after their prior activities in EUR/CHF, their reserve basket was underweight dollars so they were simply rebalancing their portfolio by increasing the dollar weight. (At last! A CB that isn’t trying to kick George Washington while he’s down!)

Then again, maybe they wanted to give the ECB as little reason as possible to whinge about their activities. Word on the strasse is that Frankfurt was none too pleased with the SNB’s purchases of EUR/CHF in March, which perhaps helps explains the SNB’s lengthy slumber.

By intervening primarily in dollars, the SNB is sort of cutting the ECB out of the equation; the Eurozone can hardly moan when the ECB isn’t actually trading the euro. And hey, if the market takes EUR/CHF higher as as the SNB buy USD/CHF, the Swiss can say “wasn’t me, guv, honest!” to the ECB.

Then again, maybe it isn’t a coincidence that the Swiss came out in force ninety minutes after the ECB published the results of their LTRO. After all, the ECB have sort of lost the moral high ground over the Swiss version of QE after conducting a wheelbarrow tender of their own.

All of this is very interesting, of course, but still leaves Macro Man scratching his head. Just call it another entry for the drawer labeled “things I don’t understand”, one currently located in a very large warehouse in the English countryside.