FX Daily, July 05: Sterling Hammered to New Lows, Yen Pops, SNB intervenes

Swiss Franc and SNB interventions

It was another day of heavy SNB interventions. The central bank kept the euro nearly stable. As we explained before, she recycled sterling inflows in CHF into euros. Based on the magnitude of the GBP decline against EUR (see below), we estimate 2 to 4 bn CHF interventions.

Brexit

The British pound has been hammered to fresh lows just above $1.3115. The euro is moving toward GBP0.8500.  The immediate catalyst is three-fold.  First, one of the UK’s largest property funds has moved to prevent retail liquidation. Second, the BOE reversed an earlier decision on the capital buffer for banks, which is tantamount to easing policy by boosting the banks’ lending capability by as much as GBP150 bln.  Third, UK services PMI was weaker than expected.  Nearly 90% of the responses were given before the referendum, but the sharp decline in business expectations warns of future problems, even though the new orders component rose 1.0 to 52.3.   Speculation is mounting that the BOE will ease monetary policy at its next MPC meeting on July 14.

Sterling is the weakest of the majors, off 0.8%.

Yen

The yen is the strongest of the majors, up about 0.8%.   Although the yen’s gains in such an environment are usually referred to a function of safe haven demand, we continue to think this is a poor way to characterize the price action.  Who is buying the yen?  Yes, there are some speculators, and this has been picked up by the Commitment of Traders in the futures market, a proxy for momentum and trend following market segments.

However, these flows are modest compared with the weekly MOF data. Last week’s report showed foreign investors sold more than  JPY2.1 trillion of Japanese bonds, one of the largest weekly divestments on record, and the second week of sales.  They also sold Japanese equities (~JPY184 bln) for the second consecutive week.  We suspect that Japanese investors and corporations are the biggest buyers of yen and that this is not so much a safe haven demand, as reactive hedging of overseas investments and earning.

The buying of the yen is different than the buying of US Treasuries or other core bonds. US and Germany benchmark 10-yields are at new record lows.  Peripheral yields are higher.   Part of this may be a function of pricing in weaker growth and lower inflation, but it appears largely driven by capital preservation strategies.

Eurozone

The eurozone services PMI came in at 52.8, besting the flash reading of 52.4. Nevertheless, it is still down from 53.3 in May.  The Q2 average of 53.1 is only a little lower than the Q1 average of 53.3.  This, coupled with the manufacturing survey results from last week, kept the composite reading unchanged at 53.1.  June was the fifth month that the composite has been stuck in at 53.0-53.1.

China

China’s Caixin services PMI was reported at an 11-month high of 52.7, up from 51.2. However, the composite slipped for the third consecutive month (to 50.3 from 50.5). Separately, the Shanghai Composite yesterday’s gains, tacking on another 0.6%. It now stands at its highest level since April. Meanwhile, the spread between China and US 10-year yields is near 147 bp today, the widest since last August. Foreign investors boosted Chinese debt holdings by a little more than 7%, according to Chinese data, to CNY318 bln (~$45 bln). Note that in the past month; the yuan has lost about 0.9% against the US dollar, which offsets nearly 2/3 of the interest pick-up.