Posted June 24, 2009
Swiss government currency market intervention is suspected leading to a weakening of the franc. The UK pound strengthened against the euro, yen, and Swiss france. The US dollar strengthened against the yen.
On 12-March-2009 the Swiss National Bank indicated it might be willing to intervene in the currency market if the Swiss franc continued to strengthen. The bank did not overtly follow through with this action but there is speculation that an agent or a multilateral bank did just that – intervene.
The Swiss government is determined to put a halt to the appreciation of the franc in order to protect its economy. Analysts seem to think a Swiss agent has entered the market to buy euros and sell francs. The franc weakened to 1.5292 francs per euro. It also weakened against the US dollar to 1.0991 francs.
Ashraf Laidi, chief market strategist in London at CMC Markets believes, “They’re trying to put a line in the sand at 1.50 (against the euro). There’s a big debate as to whether they will continue doing this, and for how long they will remain successful.” The Swiss economy is expected to contract by up to 3 percent in 2009.
Investors expect the Brazilian interest rate to be reduced to 8.75 percent in July by the central bank. This is expected to be the last interest rate cut related to a policy of loose monetary policies. The easing cycle is coming to an end as global signs grow the recession is continuing to slow.
The Brazil real strengthened to 1.9723 real per US dollar which is a 17 percent increase year-to-date.
The UK pound rose against the euro, yen, and Swiss franc yesterday. The Organization for Economic Cooperation and Development reported it expects the UK economy to stabilize in 2010. The pound strengthened to 84.87 pence against the euro. It also rose to 157.31 yen per pound and 1.8039 francs per pound. The pound held fairly steady against the US dollar at $1.6452.
The UK government 10-year bond yields fell to 3.70 percent. The two-year gilt yield declined to 1.17 percent. Yesterday the Bank of England entered the market and bought its own debt in a move similar to US action. The BOE purchased 3 billions pounds of gilts in a continued program of quantitative easing.
The Canadian dollar fell against the US dollar to 86.47 US cents. This was primarily in response to the news the US Federal Reserve will not change its bond purchase program. The US dollar remains an investor refuge leading to softening of the loonie.
The US dollar strengthened against the yen to 95.65 yen per dollar. It also rose to $1.3928 when paired with the euro. The dollar strengthened in response to the Federal Open Market Committee making a statement that the US GDP contraction is easing. The FOMC said, “Substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.”
There is continuing discussion concerning the role of the US dollar in the future economic picture. BRIC (Brazil, Russia, India, China) is pushing for an International Monetary Fund currency which is composed of a basket of currencies. Up to 80 percent of global trade is currently transacted with US dollars. There is increasing interest in establishing a basket world reserve currency and putting controls into place that will prevent another economic crisis such as the one initiated by the US financial market collapse.
The US economy may be showing signs of possible recovery, but the economic news is mixed. New home starts dropped 33% June to date compared to May. The number of people going on welfare (public assistance) is continuing to grow. Also growing are US foreclosures.
The currency and equity markets remain volatile and for a good reason – the recession is still ongoing and months away from ending.