Switzerland's Dollar Denominated Debt and the Fed's Shrinking Balance Sheets 13 comments
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Two Overlooked But Revealing Developments
There were a couple of important developments that seemed to have been over-looked or under-appreciated in recent days, and I am not talking about the groundhog Punxsutawney Phil not seeing his shadow, foretelling another six weeks of winter.
Swiss National Bank Issues Dollar-Denominated Debt
The first has sparked ideas in some quarters that the dollar's days as the world's premier currency are over. A combination of military overreach and financial excesses has done the greenback in. Some pundits thought that before the current crisis is over, the US might have to consider issuing bonds in foreign currencies, like Jimmy Carter did in the late 1970s and the Roosa bonds in the Kennedy Administration (named for the under-Secretary of the Treasury Robert Roosa and, later a partner at Brown Brothers Harriman). One analyst from a major bank had an op-ed piece in the Financial Times recently urging the Obama Administration to commit against issuing such bonds.
On February 2, the Swiss National Bank, a well respected central bank, announced that starting in the middle of February, it would issue its own US dollar denominated certificates—T-bills by another other name. These dollar-denominated bills will be sold every two weeks, starting Feb 16 and in tenors of 28, 84 and 168 days. Current counterparties of the Swiss National Bank can participate in the auctions and the bills can be used as collateral in other dealings with the central bank. In days since the SNB's surprising announcement, the Swiss franc has under-performed. It has lost about 0.68% against the dollar, making it the second worst performer after the Japanese yen in recent days.
The dollar reached its best level against the Swiss franc just before the horrible US jobs data, since the middle of December. Why did the SNB decide to issue dollar denominated T-bills? The purpose does not appear to be a signal of monetary policy, though SNB officials seem to have expressed concern about the Swiss franc's strength and reminded the market recently that it could intervene, if needed. The reason the SNB is raising dollars is to help alleviate the financial crisis in Switzerland. In particular, the SNB needs dollars to help finance its Stability Fund, that is to purchase illiquid assets from troubled financial institutions like UBS. A good part of the toxic assets are believed to be denominated in dollars.
Fed's Balance Sheet
The other development that few seemed to pick up on is that for the fifth consecutive week and for six of the past seven weeks, the Federal Reserve's balance sheets shrank. In the latest week, it declined by $76 bln to stand at $1.85 trillion. This is the smallest the Fed's balance sheet has been since late October 08. The reduction of the Fed's balance sheet reflects the self-liquidating nature of some of the facilities the Fed has established, like the commercial paper funding facility and the swap lines with foreign central banks.
This past week's decline can be fully traced to the $78 bln decline in the liquidity swaps provided to other central banks, especially the European Central Bank. This partly seems to reflect unwinding swaps established in the period leading to the turn of the year. The reduction in the Fed's balance sheet will likely prove temporary. As the Federal Reserve continues its purchases of mortgage backed securities, the balance sheet will likely resume its growth. The MBS purchasing program began in early Jan and has totaled a little more than $75bln, though it has not fully showed up yet in the weekly report, which only tracks settled trades.
Near-Term Dollar Prospects
The de-leveraging process has helped underpin the US dollar and yen in recent months. While the de-leveraging process appears to be continuing here in Q1, it does not appear to be having the same positive impact on the dollar in recent weeks, though to be sure, the dollar is stronger against nearly all the major currencies and many emerging market currencies this year.
To the extent that momentum traders (trend followers) have dominated the short-term flows, it is important to recognize that the euro's downside momentum appears to be stalling. It recorded the low for the year thus far on Feb 2, just above $1.27. Those last downticks were short-lived and difficult to achieve. That marks a near-term base. On the upside, the euro has not traded above its 20-day moving average since Jan 5 and has not closed above that average since Jan 4. It comes in now around $1.3040. A convincing break above here would immediately target the $1.33-$1.34 area.
The British pound often appears to lead the euro and it seems to be doing so now. It recorded the low for the year and a multi-year low on Jan 23 near $1.35. A short-term trend indicator turned positive on Feb 4 as the 5 day moving average crossed above the 20-day average. The next objective is near $1.50. The cent band between $1.4550 and $1.4650 should now offer support.
The Japanese yen, as often is the case, is a different kettle of fish. Its strength appears to have cracked in recent days. The dollar put in its low so far this year on Jan 21 near JPY87.13. After trading choppily in recent weeks, the dollar rose to near a four week high on Feb 5 near JPY92.25. Once this level can be overcome, the JPY95 area becomes the next target. It may be difficult to achieve without a news stream that encourages operators to look past the immediate dismal news and be more optimistic that the US and other countries are taking measures that may still pave the way for the beginnings of a recovery later this year.
Disclosure: no positions
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All the junk MBS has been on vacation around the world,but its coming back to its new home,the FED balance sheet.
MBS repurchase...bad,bad banks..
The thing that keeps pestering me is the bulk of the derivative positions have not as yet materially dissapated. My understanding, back a couple of months, is that there was over 600 Trillion of derivatives whose backing positions were up to 1 to a 100 of leveraging. Simply stated, the total amount of leveraged issues in ratio to world GDP is something on the order of 20 to 1, or to put it still more succinctly, even God doesn't have that kind of money. So, now, we are to beleive that 32 Trillion (I capitalize trillion so you cannot mistake it for billion) has come off the table. Just a starter.
Stimulus, shimulus; or how about "no way Jose". The FED is standing by to provide as I understand it 8.5 Trillion to shore up the balance sheets of the big banks, ha,ha,ha,ha! And the congress' 800 billion come a trillion for boondoggles, ha, ha, ha, ha!
But then you can't blame them either in the sense that as Einstien said, " you cannot fix the problem with the people that caused the problem". So, obviously, the morons who threw caution out the window and caused this calamity with such oxymorons as "we need to make housing more affordable for the poor". Ha, ha, ha, ha. Or, rather, if you can vote, you should be able to buy a house you cannot afford. "Here comes Santa Clause, here comes Santa Clause, right down Santa Clause lane".
In sum, we have to deleverage, we have to put teeth into regulation, but not against the big banks, no, against congress! Dr. Ron Paul knows what needs to be done, tighten the belts, get back to the constitution and to a non inflationary money standard. Amen.
On Feb 08 10:56 AM secmaven wrote:
> The Swiss are smart. Sell dollar debt today, wait for inflation to
> destroy the value of the dollar and pay back the debt with cheaper
> dollars.
Good words, you read the Daily Reckoning!
Locking up 2 million acres of forest in the west destroys jobs. Oil & gas need to be drilled, foreign unbalance of payments needs to be fixed. Compressed natural gas cars & trucks will create immediate sales, because they offer an operating saving that is real. Our coal & grain exports are the only thing keeping our country solvent.
Is it a good idea to stay in the Yen for about 1 year? 2 years?
I, as an American Citizen, have lost most of my confidence in our beloved fiat currency...and I need to know a safe place to put it. I'm also part of the ultra-paranoid, I think, and so even symbols like GLD scare the hell out of me (though GDX seems safe for now..)
What's a boy to do?...and if anyone has had any doubts about the societal effect on savers in the US, I'm evidence that its pretty negative, I'd consider myself a miser.