European stocks were down once again yesterday; the Euro STOXX 50 index has fallen in seven of the past nine sessions and is not far off flat for the year. The Nikkei has also sold off for the seventh consecutive session. It seems that for most of the year to date, investors have been able to hang on to the perception that the US economy is gaining traction and the eurozone credit crisis, if not past its worse, had at least moved back from peering over the cliff edge. This is not totally unfamiliar territory for markets, given we’ve seen several periods since 2009 during which markets have priced in a sustained recovery, with reality then choosing to bite. For FX, it’s the traditional safe-havens that are taking the strain, the yen having unwound around one third of the recent depreciation and the Swiss franc battling with the ceiling imposed by the SNB.
SNB vs. the markets. Yesterday’s comments from acting SNB President Jordan offered an interesting perspective on Thursday’s EUR/CHF price action, during which the cross briefly moved below the 1.20 floor imposed by the SNB back in September. His defence is that the breaches that were seen were part of the “segmented market” that forex is, by banks “which do not have an agreement relating to limits with the SNB”. In other words, they are not able to trade with the SNB and receive the better bids in the market that the SNB was showing at that time. It’s interesting that the SNB felt the need to clarify the situation, not least because some were questioning how it was that trades were able to take place below 1.20 It’s true that markets are not perfect, not least the FX market which, despite its liquidity, remains an OTC (over-the-counter) market, where there is no central exchange to bring together buyers and sellers. But this breach, setting aside the technicalities and together with the fact that the SNB is currently without a permanent president, means that the central bank is under increased pressure - more than would be the case otherwise - to successfully defend the level on a continuous basis. Plus the fact that EUR/CHF has traded within 1% of the 1.20 level for nearly all of this year underlines both that the fundamentals are not in the SNB’s favour and that the SNB’s efforts are not without cost (in terms of impact on the domestic economy). Otherwise intervention would be used to produce a safe distance.
Turbulent times down under. A fresh three-month low for the Aussie overnight of 1.0226 in a continuation of the consistent downward trend evident since early March. For the emboldened bears, the succession of lower lows and lower highs, and the fact that the AUD is below both the 100d and 200d moving average, are providing them with renewed encouragement. Renewed fears regarding Europe’s fiscal miscreants have triggered another flight from risk, which invariably hurts the Australian currency. On the fundamental front, the case for further rate cuts from the RBA continues to build. In February, home loan approvals fell by another 2.5%, as first-time buyers in particular have withdrawn from the market. At the same time, as we reported last week, there was a surge in properties being placed on the market last month. Clearly, these are turbulent times in the Aussie property market. Separately, a consumer confidence measure calculated by Westpac and the Melbourne Institute fell to an eight-month low in April as households fret over the high cost of borrowing. Australia’s central bank has already signalled that it will be prepared to reduce rates next month should the next quarterly inflation figure (due in less than two weeks) suggest that price pressures are moderating further. A 25bp reduction in the cash rate at the May meeting is virtually fully factored in.
Spain’s struggle. With 10yr bond yields back at 6%, Spain appears to be running forwards, yet going backwards when it comes to convincing markets that is on the right track. The PM is due to address parliament later today to offer further assurances to investors that the country is on the right track and can deliver the austerity set out in his latest budget. Naturally, the fact that there was such a miss on last year’s deficit target means that there is a decent amount of scepticism in markets that achieving this will actually be the case. The single currency has not been overly pressured by these latest developments, which is understandable given the more risk-averse environment we are currently in.