Dollar Softer, Consolidating Recent Gains

The US dollar is sporting a slightly softer profile, but the price action is really more of a consolidation than a trend reversal. The euro has gained nearly 0.5% today but remains well last Friday’s high of about $1.1375.   

The euro’s gains late yesterday and earlier today were partly fueled by signs that the Swiss National Bank had intervened. We had previously suggested that the price action appeared to be consistent with intervention after the cap was removed. Many were skeptical, thinking the removal of the cap was an indication that 1) the SNB was under pressure, not to expand its balance sheet further and 2) was stepping away from the market.  

Yesterday’s weekly report showed that sight deposits rose 8% in the week ending January 23. This is the largest rise in sight deposits since July 2013. This was followed up by comments by the SNB’s Danthine, who reinforces this interpretation, arguing that current franc levels are unjustified and that the SNB was still prepared to intervene. As we do not think the SNB’s worldview has not changed, we suspect that what is ultimately involved here is a change in tactics. The cap offered a Maignot Line of sorts. It committed the SNB to obvious intervention. The new tactics inject more ambiguity and intervention discretion.  

That said, the euro-franc cross remain volatile. It initially extended yesterday’s gains to the post-cap high near CHF1.0385 only to be sold back off below CHF1.01 in mid-morning European activity. As the euro came off against the franc, it also surrendered some of its gains against the dollar.  

Greece bonds and stocks are lower.  Market participants remain divided. Some remain concerned that the demands that Syriza has for its official creditors are too much. Any concessions, they worry, will be similarly demanded by others. There are still those who think that Syriza is “blackmailing” the creditors with the threat of default. On the other hand, we continue to expect hard negotiations and officials have until the end of February to reach an agreement. At the end of February, the two-month extension ends. We expect compromises to be struck. It could include a smaller target for the primary budget surplus. It could include some reduction in the debt servicing costs.