The liquidity monster and FXCM

As we have already pointed out about Thursday’s unprecedented Swiss franc move following the SNB’s announcement about removing its 1.20 euro level floor and introducing a -0.75 per cent interest rate regime, the real story to pay attention to is what exactly motivated a price surge to that level.

Was it a), that the SNB simply under appreciated the scale of the undervaluation it had been engineering in the franc? Or was it b) that the SNB under appreciated just how thin FX market liquidity is in the market these days?

So as to not sit on the fence, we’re going to take a view and speculate that it’s actually all down to option two. Read more

Further reading

Elsewhere on Friday,

- The myth of the special German saver.

- “SNB have effectively done for central banking what the Ferguson Police Department have done for community policing.”

- And, how the SNB’s “wimp-out” will make life harder for monetary policy in other countries.

- Saxo mightn’t like where you traded yesterday. So it’s going to “revisit”, “revise” and amend “to more accurate levels”.

- Why below target inflation is a big problem.  Read more

FirstFT (the 6am Cut)

Sign up here to receive the email.

Asian markets have been roiled by Switzerland’s central bank scrapping the Swiss franc’s currency ceiling. Equities were sold off while currencies and bonds rallied, with investors eyeing the Australian and New Zealand dollar as attractive alternatives for parking cash. Read more

Stop worrying about Swiss franc mortgages in Poland

The Swiss franc gained about 23 per cent today against the Polish zloty. That should be good news for Polish manufacturers, but a few commentators have noted that it’s bad news for Polish mortgage borrowers who have loans either denominated in francs or indexed to the franc.

And it seems like there are a lot of them: 46 per cent of total home loans are tied to the franc. Bloomberg quotes a currency strategist saying that the weaker zloty “might fuel concerns about financial stability in Poland.” Read more

What did the SNB do to EURCHF options markets?

The Swiss National Bank made G10 FX a lot more fun to watch today. One interesting thing is how the options markets responded.

Via Jared Woodard of BGC, here’s a chart comparing the move in one-week implied volatility in the exchange rate between the Swiss franc and the euro — basically, the cost of hedging the risk that the franc appreciates plus the cost of hedging the risk that it depreciates — against the actual move in the EURCHF exchange rate: Read more

Orderly adjustment and the 50 per cent club

There’s plenty of discussion about why the oil price collapsed (read Izzy’s take on the changed structure of the market, for one), but consider a broader question: if markets can be so wrong about the price of one of the most widely used and heavily traded commodities, what else are they missing?

We ask because a halving in the price of other markets may not be cheered in the same way as cheap oil. We also wonder what it says about how orderly (or otherwise) big market declines will be, when they eventually roll around. After all, major currency pairs don’t move by a fifth in one morning…

To that end, here’s a reminder of what a 50 per cent decline looks like for a selection of markets, and the last time that level was hit. Read more

The risks of deflation in China

Or the risk of “lethal damage” if you’re into that sort of thing.

As said before, we’ve had 34 months and counting of negative PPI inflation in China with CPI at best lacklustre — coming in at 1.5 per cent in December. The risk is that, in a country charmingly wrapped in debt based uncertainty, we get outright deflation. Read more

Huf and puff

Looking beyond the major currency pairs, remember that question of Hungarian debt denominated in Swiss Francs from a while back?

Well, a line from Citi’s reaction to the SNB ceiling removal explosion on Thursday catches the eye: Read more

The SNB and the Russia/oil connection

A quick post to collate a few side theories on the reasons, justifications and consequences of the SNB move.

Simon Derrick at BNY Mellon is first to point out that the euro floor/chf celing was leaving an open door to safe haven flows from Russia by way of an open bid for euros. As he notes:

Compounding this was Switzerland’s role as a safe haven as the Russian crisis intensified. It was, therefore, not entirely surprising when the SNB decided a few weeks ago to impose an interest rate of -0.25% on sight deposit account balances at the bank and expand the target range for three-month LIBOR to -0.75%/+0.25%.

 Read more

Darling, how about Paris?

Your UKIP loving, separatist-nurturing currency now buys 1.3 euros, the most since 2008.

Markets Live: Thursday, 15th January, 2015

Live markets commentary from 

Sack Thomas Jordan?

I mean really…

This from JPM asks the right questions: Read more

Goodbye Swiss franc floor (UPDATED)

Click through for the readable version:

For those who can’t click, that’s the SNB abandoning the 1.20 floor, cutting the deposit rate to -75bp and moving the target range for three-month Libor further to -125bp/-0.25bp.

Yeah… Read more

What is the oil crash going to do to Canada?

Lower oil prices are likely, on the whole, to be bad for Canada.

–Timothy Lane, Deputy Governor of the Bank of Canada, January 13, 2015

Unlike most rich countries, Canada is a net oil exporter. According to the US Energy Information Administration, Canada’s net exports of petroleum have more than doubled since 2005 to about 1.7 million barrels per day:

 Read more

Further reading

Elsewhere on Thursday,

- Hoping for a Syriza victory?

- Osborne’s “commitment to policy inflexibility in order to achieve policy flexibility.”

- Convergence in two global economics.

- How the Fed might stop worrying and learn to love moderate inflation.  Read more

FirstFT (the new 6am Cut)

Sign up here to receive the email every day. Read more

Markets Live: Wednesday, 14th January, 2015

Live markets commentary from 

The one chart bear case for US stocks [Update]

Jeffrey Gundlach, founder and head of the LA based bond management shop DoubleLine, was talking about infinite quantitative easing years ago and is one of the most prominent bears on the investment scene, correctly predicting last year’s fall in bond yields.

Tuesday’s presentation was a variation on that theme, with the investor warning that while lower oil prices help the US economy, watch out for the impact of the shale boom deflating. A few choice slides below, starting with one to keep in mind on the US stock market.

We always hesitate to use the word unprecedented.* Still, another year of gains for US stocks would be the seventh in a row and, well… Read more

ECJ: OMT OK (ish)

UPDATE: The full, 263 point, opinion is out and here.

Do click through for the full statement on OMT (and QE by extension) from Pedro Cruz Villalon, one of the European Court of Justice advocates generalsRead more

What is the relationship between inflation and investment?

Conventional wisdom says that businesses adjust their investment spending according to changes to the cost of capital. Intuitively, that makes sense: more projects become worthwhile as funding costs go down, while few make the cut when capital is expensive. (In reality, it turns out that interest rates, spreads, and volatility are all irrelevant for capex decisions, but let’s put that aside for now.)

If central bankers want to boost investment to encourage economic activity, conventional theory suggests they should lower interest rates. However, there is a limit to this process because you can’t lower rates below zero without imposing tyrannical controls. Hence the appeal of boosting inflation, which effectively reduces the real cost of capital (assuming risk premia don’t rise) by stealth even when interest rates have hit the floor. Read more

I was a bad coin for breaking your heart

And I’m free, free fallin’…

 Read more

Further reading

Elsewhere on Wednesday,

- “Redrow Man might be ascending into a mirror-and-chromed hell but at least he’s going somewhere.”

- Rage and Reaganolatry.

- Russia: deja vu all over again. Only worse.

- Hold on, “some loosely affiliated guys punching hot keys in China were defrauding high-frequency traders out of millions of dollars”? Read more

FirstFT (the new 6am Cut)

Sign up here to receive the email.

Copper prices hit a five-year low and oil prices continued to slide today, highlighting the debate over the benefits of low oil prices just one day after the World Bank cut its forecast for world growth. (FT) Read more

Was the 2008 oil price an anomaly?

The parallels between the oil markets and bitcoin continue to astound.

Over in the bitcoin universe, for example, questions over the legitimacy of the $1,200 level achieved in November 2013 have begun to circle. The running theory is that the ridiculously high price was only achieved because Mt.Gox — Bitcoin’s premier exchange until it collapsed in February 2014 — was in league with manipulative HFT traders who, with the help of a proprietary algorithm nicknamed the “Willy Bot,” pumped the price as far as it could go, and then cashed out.

Over in the oil world, meanwhile, a similar dialogue is coming forth with regards to the record prices achieved in 2008. Read more

UK disinflation should be cause for cheer

For years, the UK has added more jobs than almost any other country in the rich world even as real incomes plunged thanks to underwhelming productivity growth. Now it seems that a new burden has been added: disinflation. Prices are just 0.5 per cent higher than a year ago.

The BBC’s Robert Peston worries that this “is not much of a buffer against deflation” and that “if we became accustomed to prices falling as the new norm, we would spend less – in that delaying would always make our money go further. And then the economy would sclerotic and stagnant, and desperately difficult to reinvigorate.” Given that UK household debt is already staggeringly high relative to income and projected to rise much further, that could pose serious problems down the road. Read more

Do you have a finance degree from the university of Bitcoin?

As the Bitcoin price crumbles….

… and the capital hole (economic flaw) at the heart of all cryptocurrency schemes is exposed, we thought we’d uncharacteristically look at what was actually good about the phenomenon of Bitcoin. Read more

Guest post: The euro question

Despite many recent reforms, standstill in euro area output and prices–alongside renewed debates on Grexit–have put fundamental questions about the euro back on the map. Perhaps, argues Peter Doyle, economist and former IMF staffer, that is because the key question about the euro has yet to be posed.

________________________ Read more

A Worthington tale

Ok, go down this alphabetical list of corporate tenants at the front door of a shabby office block in south London. You’re looking for the name “Worthington”. Click to enlarge if needed…

 Read more

China, stimulus and the Chewbacca defense

The thing about the relationship between monetary stimulus and inflation in China is that — much like like a Wookie, an 8ft tall Wookie, living on the planet Endor with a bunch of 2ft tall Ewoks — it does not make sense. At least not if you approach it with a conventional eye.

So says China maven Michael Pettis, who emailed us over the last few days to say we must, at minimum, consider the possibility that there is a reason rapid credit growth in China has failed to do what it’s “supposed” to do. And, by extension, why deflationary pressures in China indicate the probable need for monetary tightening, not loosening. Read more

Markets Live: Tuesday, 13th January, 2015

Live markets commentary from