SNB Needs to Fess Up

That what they really want is for CHF to depreciate by 30%.

Goldman says:

Released: Tuesday, August 25, 2009

Jordan reiterates: no need to change monetary stance

In a speech, his second speech today, SNB board member Jordan stressed again - after an interview on August 18th with the same message - that there was no need for the SNB to change its monetary policy stance. While acknowledging that "also for the Swiss economy indicators are signaling a turn for the better", "dis-inflationary tendencies are still dominating".

More specifically Jordan said that the time for a change in monetary policy has not come. There is "no necessity to act". In fact, the SNB will continue its "very expansionary monetary policy".

The SNB will hold its next quarterly meeting on September 17th.

Switzerland -- Add to My Axis of Evil

CHF up 1% today - biggest upward mover against USD among G10 - despite their central banker said they will continue intervening in the currency market to prevent further appreciation of CHF. They seem to be scared shietless that Swiss economy is in tolilet, and seem more eager than US or Europe to provide whatever assistance need to get things humming. The SNB says they have no plans to alter its policy of intervening to prevent any appreciation of the Swiss franc, providing generous liquidity to the banking sector and purchasing corporate and covered bonds.

Getting smacked on my short on CHF. Thankfully long NOK and JPY, short GBP and NZD doing well.

USD - capital flows?

So I am trying to get some more insight on drivers of USD. With all this talk of rush to risk taking and dumping of USD-denominated assets I decided to look deeper into the Treasury international capital flows data. As you probably know, the US Dept of Treasury provides capital flows data on a monthly basis albeit a long delay. So long that it likely is useless as any sort of trading indicator. Still, I just wanted to see if there is a consistent relationship.

Looking at monthly flows data vs performance of DXY Index the answer seems to be no. Doing a rough stat analysis (my favorite kind), out of 114 months starting Feb 2000, only in 51 months did DXY move consistently with flows data (outflow = DXY down, inflow = DXY up).

Just looking at the data since the start of financial crisis, the relationship isn't clear. In Dec 2008 DXY dropped huge 6% despite net inflow of $70B, and the index gained about 8% in Jan and Feb 2009 despite total net outflow of about $230B. The first chart shows the relationship.

I did some further analysis including trade data, but that did not shed any additional light.

On an interesting note, below is rolling 12months net capital inflow for US. This persistent positive capital inflow is needed to offset as persistently negative trade deficit. Despite the huge inflow during the crisis period US is looking like it is having trouble attracting foreign capital. Where is it going to from here? An interesting economic question but probably not one that provides a tradable thesis.