19 Jan 2015
Capitulation as EUR weakness intensifies – Rabobank
FXStreet (Barcelona) - The Rabobank Team explains that EUR weakness has led to capitulation in the demand for the single currency with fund managers deviating from EUR holdings and now SNB scrapping off its CHF floor to curb an additional negative impact on its balance sheet.
Key Quotes
“By pushing interest rates further into negative territory, the SNB is trying to fend off demand for its currency. This week’s announcement that the SNB is moving the target range for the three-month Libor further into negative territory (to between –1.25% and −0.25%, from −0.75% and 0.25%) comes less than a month after it first pushed rates into negative territory. The pace of the SNB’s latest policy moves smacks of a desperate attempt to push back against the impact of EUR weakness.”
“IMF data show that in Q3 2014 reserve managers pared back EUR holdings to their lowest level since 2002. The implication is that the June 2014 decision by the ECB to push its deposit rate into negative territory and the additional rate cut in September has been having an impact in steering reserve managers away from the EUR.”
“The SNB retaliated in December with its first announcement of negative interest rates, but the impact on its balance sheet from trying to stem the impact of a cheapening EUR appears to have become too difficult to manage.”
“Back in October, SNB Vice-President Danthine suggested that the SNB had no immediate plans to reduce the size of its balance sheet. Back then SNB foreign currency reserves stood at around CHF 462 bln –having trended higher since the floor was introduced. Around one half of these reserves were in EUR, making the balance sheet appear very uneven.”
Key Quotes
“By pushing interest rates further into negative territory, the SNB is trying to fend off demand for its currency. This week’s announcement that the SNB is moving the target range for the three-month Libor further into negative territory (to between –1.25% and −0.25%, from −0.75% and 0.25%) comes less than a month after it first pushed rates into negative territory. The pace of the SNB’s latest policy moves smacks of a desperate attempt to push back against the impact of EUR weakness.”
“IMF data show that in Q3 2014 reserve managers pared back EUR holdings to their lowest level since 2002. The implication is that the June 2014 decision by the ECB to push its deposit rate into negative territory and the additional rate cut in September has been having an impact in steering reserve managers away from the EUR.”
“The SNB retaliated in December with its first announcement of negative interest rates, but the impact on its balance sheet from trying to stem the impact of a cheapening EUR appears to have become too difficult to manage.”
“Back in October, SNB Vice-President Danthine suggested that the SNB had no immediate plans to reduce the size of its balance sheet. Back then SNB foreign currency reserves stood at around CHF 462 bln –having trended higher since the floor was introduced. Around one half of these reserves were in EUR, making the balance sheet appear very uneven.”