The VP Blog

A blog about financial markets and the VP investing framework

EURCHF Floor Vulnerable as SNB Sterilizes Much of FX Intervention

The SNB lately reiterated its stance to maintain a EURCHF floor of 1.20. In the process, the SNB has amassed billions of foreign currency-denominated assets, about half of which is EUR, and certainly some of dubious quality (some of the recent moves tighter in French yields have been due to Swiss central bank buying, who have been deterred from channelling any further flows into short-term German bonds paying negative yields).

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Growth in Foreign ownership of us treasuries is falling but not collapsing

Chinese reserve accumulation has slowed down rapidly. As a result the growth of foreign ownership in US treasuries (USTs) has fallen. The global liquidity pump of Bretton Woods II, in which pegging emerging markets are recycling their increase in foreign exchange reserves into US treasuries in order to keep their currencies stable against the USD, has slowed, but not stopped altogether.

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Jobless Expansion Trend in the US Hits New Lows

So far the recovery in output, income and employment following the 2008/09 recession has been the weakest on record with only industrial activity appearing to buck the trend. Most remarkably, however, is the steady decline in post-recession expansions of employment and personal income growth. In the US, these have fallen since 1982, but have currently hit a new low point.

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Hungary could face collateral damage from an unwind of the CHF peg

One country very sensitive to economic events in Switzerland, specifically the strength of the CHF, is Hungary. Hungary has a high ratio of loans denominated in a foreign currency – over 60% of GDP – most of which is in Swiss francs. As the HUF weakens, especially if against the CHF, Hungary’s external debt position rapidly worsens. Indeed, the correlation between Hungarian CDS and CHFHUF is as high as it’s been in 2 years.

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