One Around Two
We are near the edge on a few situations in the FX markets. I'm watching the EURCHF and the USDYEN.
The market traded EURCHF to a low of 1.2032 today. It closed at a (slightly) safer 1.2044. I would not be surprised to see this cross trade very close to the official peg of 1.20 in the not too distant future.
There is no doubt in my mind that the Swiss National Bank (SNB) will be involved when and if the EURCHF hits the 1.2000 mark. My guess is that 99% of everyone else who "votes" in this market believes the same. This begs a question.
"If everyone knows the cross can't go below 1.20, then why in hell is it sitting 44 lousy pips away from the peg?"
The EURCHF is a very good funding currency for a carry trade. Yields on French and Italian bonds make it attractive, given that Swiss money can be had through the swaps with a negative Vig. It seems like the market wants to trade the EURCHF very close to the peg for the time being. That's odd, given that it's a "100% sure thing"
that the SNB will protect the downside.
The Dollar is a sideshow for the Swissie. I doubt many are trading USDCHF these days. It's worth noting that the Dollar got beat up for five big figures against the Euro the past week or so. Normally when you see Euro strength versus the dollar, you also see it in the EURCHF cross. Not this time around. It does make me go Hmmmm.
I think there are scenarios where the EURCHF could trade to the peg. If, by surprise… the Greek deal fell apart, money would move into the Franc. It could be something subtler. A reminder of just how fragile the Euro system is these days might do it. For example, this headline from the WSJ that came out after the NY close may scare the crap out of many people with bank accounts in the EU.
If the EURCHF does test the peg, it will probably happen during European trading hours. I expect the SNB's new boss, Thomas Jordan, will stand up and bid 1.1999 for all the Euros the market has on offer.