The FX markets are squeezed by busy eco-political calendar. The Fed hints at steeper rate normalization path, yet repeats that the first action will be taken “considerable time” after the end of the APP. In Switzerland, the SNB choses to keep the negative-rate joker in hand; a good decision in our view given the significantly disappointment at the first round of the ECB’s TLTROs.
Today, Scotland votes for its independence. The yes-no gap remains tight according to latest polls. The referendum results are due early tomorrow morning. The GBP-complex remains range-bound given the uncertainties. Volatilities are expected to shift higher as the first results start flowing in.
SNB prepared for immediate action
The Swiss National Bank kept its 3-month libor target unchanged at 0.00-0.25% and renewed its pledge to defend the EUR/CHF peg at 1.20, saying it is ready to buy unlimited quantities of FX if needed. The SNB focused on the deterioration of the international environment in the recent months and warned that the Swiss deflation risks are higher again. Especially given the heavy ECB stimulus and the geopolitical risks favoring the franc strength, the SNB said to be ready to take immediate action if and when necessary. Swiss franc shortly gained post-SNB.
At this point, we remain comfortable with the SNB policy. As the “floor” has not been challenged we did not expected the SNB to go on the offensive. The SNB understands that the effectiveness of policy tools might be muted when faced with a “wall of orders” or catalyst such as ECB actions or extreme geopolitical driven safe-haven flows. Therefore, the SNB will reserve action until absolutely necessary, in our view first with direct FX intervention.
We believe it a prudent decision to keep the negative-rate joker in hand, as the ECB has not played all of its cards yet. The ECB lends 82.6billion euros via the first round of TLTROs today. This amount falls seriously short of the already weak expectations (appr. 100bn). Today’s TLTRO disappointment tip off that the total lending will probably remain significantly short of the maximum 400 billion euros foreseen for the first two operations (the second will take place on December). If this is the case, the ECB may be brought to reconsider a QE. This is where we would be happy to see the SNB pulling out its negative-rate joker.
Steeper Fed normalization to begin “considerable time” after APP ends
The Fed did not disappoint the markets at its September meeting. The policy verdict has been perfectly in line with expectations: the monthly asset purchases have been reduced by additional 10 billion dollars and will be brought to end on October. The Fed fund rate will however remain at the historical low levels for a “considerable time” after the end of the QE, as reiterated Yellen in her speech yesterday. The key hawkish hint has been a steeper normalization path, yet the timing remains uncertain.
At this point, there is no mechanical interpretation of “considerable time” says Yellen. And we believe she will likely remain vigilant given the slack in the labor market. In this context, we keep our first Fed rate hike expectation unchanged at Q2, 2015.