European traders turned decently bid at market open amid Russian credit rating has been revised down to junk by the S&P. Although the decision was partially priced in, renewed pressures on the ruble keep traders alert on potential CBR intervention. In Switzerland, the speculations on a potential SNB intervention revived as EUR/CHF hit 1.03826, yet no tensions have been detected on the Swiss money markets so far.
Ruble: back to the bear market
The S&P lowered the Russian credit rate to junk (from BBB- to BB+) with negative outlook after the European close yesterday, as sliding oil prices and tensions in Ukraine are serious threat to country's financial and political stability. The decision was partially priced in, USD/RUB tests offers pre-70, the front-end of the sovereign curve came under pressure, while Micex sold-off to 1,614.92 at the session open before steadily recovering. At this point, tensions on ruble seem difficult to ease, concetely because the real money (direct, portfolio investments, reserve assets, fixed assets but also non-produced and non-financial assets) flies away at accelerated pace with 72.9 billion outflows recorded through 4Q, 2014. Russia's gold and forex reserves eases toward 2009 lows, 379.4 billion dollars as of January 16th. And given the free-floating RUB, the FX reserves will certainly keep fading, therefore should bring the CBR to find an alternative was to slowdown the debasing of country's currency at some point in the close future. The alternative actions range from macro-prudential measures such as further FX restriction on companies to monetary policy actions as higher interest rates. The CBR meets on January 30th and is expected to keep the bank rate unchanged at 17%. However given the selling pressures on the ruble, we stand ready for surprise, immediate intervention should off-the-schedule events push RUB to unsustainable levels, as seen on mid-December.
USD/RUB tests 70 offers. Should the sell-off gains momentum above 70, we expect the CBR to intervene to temper depreciation. The CBR interventions are published with two day lag.
EUR/CHF
EUR/CHF's sudden spike has fueled speculation that the SNB is again up to its old tricks. Just a few hours ago Jean-Pierre Danthine, Vice Chairman of the Governing Board of the Swiss National Bank, in an interview with Tages-Anzeiger, stated that SNB is still ready to intervene in FX market. We suspect that traders are still seeing the SNB shadows rather than actually FX intervention. EUR/CHF spiked to 1.03826 at European open while we believe this move is mostly backed by the broad based EUR push back, mostly due to speculative inflows into EUR from Eastern European countries amid Russian credit being cut to junk.
While the SNB credibility in policy setting might have been tarnished, the central banks reputation in aggressively acting on FX and interest rates is unparalleled. The SNB has plenty of “street cred” to build off of. Just the mere mention of potential action has traders running scared. This being said, we see no tension across Swiss markets, which may potentially suggest that an intervention is currently going on. Suspicions related to SNB actions are easily and most generally detectable on the money markets while we have a pretty relaxed morning on the rates pricing. After spiking to 101.320 on January 23rd (following ECB QE announcement on Jan 22nd), the euroswiss futures ease to 100.79 today (in line with SNB's negative rates) meaning that tensions for SNB intervention are momentarily off sight.
