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Entering The Intervention Zone
By: Bruce Krasting   Wednesday, February 1, 2012 10:32 PM

A side story to this is what happens if the cross breaks the peg outside of Euro trading hours. What if some hedge-fund types lean on it at 3 PM on a Friday in NYC? The same question arises during Asian hours. If Monday morning, in Australia, the cross is offered at 1.1997, without a bid, it will create a big splash. That "100% sure thing" will immediately come into question. Mr. Jordan doesn't want that.

There are only two possibilities for intervention outside of the Euro time zone:

1) The SNB can rely on the Central Banks of Australia, Japan and the USA. Those CB's would act on behalf of the SNB during their respective market hours.

But, realistically, there is no chance in hell for this. The US Fed can't play in this sandbox. For the Fed to participate in an effort to weaken the Franc would make it (and Tim Geithner) look silly. The USA has been threatening China with all manner of sanctions over China's policy of maintaining an artificially weak currency. The Fed simply can't help Switzerland do the same thing.

2) The SNB will give "resting" orders to commercial banks. The most likely name for this would be UBS. It would not surprise me if one of the other big banks had a turn at doing the SNB's calling. JPM and Bank of Tokyo are likely candidates, Barclays may get put on the list if persistent intervention was required.

The resting order might be:

To: Bank of Tokyo, Tokyo - FX Department
Firm order, good till cancelled. SNB offers to purchase up to Euro 200 million versus CHF at 1.1999. Call Hans -immediately- if the first E50mm is executed.

With this, we get the EURCHF trading "one-around-two" (one pip around 1.200 or, 1.1999 – 1.2001).

A few thoughts about resting orders from CBs.

*The information always leaks.

*The bank operating for the SNB will be named.

*A bank that has a large resting order from a CB has a huge tactical advantage against other market players. (I know, I played this game.)

*A move into the intervention zone will rile other markets, most notably in the Euro funding markets.


A Yen for a Yen Trade

The USDYEN is dangerously close to becoming an issue (again). The NYC low was 76.08. Anything under 76.00 might bring in the Bank of Japan (BOJ). The last time we were here was on 10/27. The chart:

Japan desperately needs a stimulus. It has gone to the cupboard for more ZIRP and deficit spending too many times. At 220% debt-to-GDP, its credit card is maxed out. My reading of the Japanese press is that more debt as a stimulus is not a viable alternative. (They are talking about doubling the VAT to 10%, to cover a portion of the deficits. Given that painful effort, they are not going to turn around and borrow more.)

The only option left is to fiddle with the FX rate. It would make a very big difference if the USDYEN was 85. The Japanese Finance Ministry folks must be looking at the SNB's actions with envy. A 15% devaluation off the low, coupled with a future exchange rate that was (somehow) pegged to the USD, or a basket of currencies, would be just the ticket.

Here again, I don't think this will happen. The boys at the BOJ know that they would have to absorb a trillion in additional reserves if they drew a line in the sand with a currency peg. That doesn't mean that they are not thinking about it. Some "Peg Talk" by some MITI types might get the ball rolling.

I think we'll see a break of 76.00 soon. The sparks will fly somewhere around 75.60. Given the deteriorating conditions in Japan since the October intervention, I do wonder if the BOJ might be somewhat more aggressive this time around.

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