Saron is the Swiss overnight interest rate, currently trading negative at -0.725 or 0.271. The SNB still has a long long way to go before the negative bottom is even close. What negative means is the SNB if they desire can still cut again. Yet ss Saron trades 48 bps below Eonia, 13 bps below Sweden Stibor and 10 bps below Denmark CD rates, a further cut for the SNB is not obvious from current levels as the SNB brought interest rates to lowest depths. Tom Next trade averages in Swiss money markets currently traded at 0 in 4 of the last 7 months and hit maximum negative bottoms in December 2014. Maximum negative is explained by the Swiss Federal Council to reduce volume issuance of Swiss Debt Register Claims in 2015 from CHF 10.3 billion to CHF 6 – 7 billion in 2016. Throughout 2016, issuance is expected to rise to CHF 8 – 9 billion yet Confederate bonds outstanding will reduce by CHF 3 billion from CHF 6 billion. Debt Register Claims are issued to pay maturing bonds as one function to its use as a means to finance in the Swiss system. The Corollary in the US is FED Funds V Commercial Paper, Eurodollars or Repo relationships. Deals are quick and short term and only point changed from nation to nation is the interest rate name as the system of finance remains the same throughout the world.
CHF M1 money supplies were negative from September 2015 – January 2016 but retained positive readings between CHF 572, 511 – 534, 553. Two day Swiss Debt Register Claims currently trade at 0.1. Last GDP in Switzerland was 0 and its explained by the volatility seen in not only Swiss money markets but all central banks due from adjustments to negative interest rates. Volatility in money supplies as all central banks are currently experiencing won’t lift GDP nor allow a clear trend until the economic systems settle. Future economics will be seen as a success or failure in money velocities as this was the major focus in Gesell’s negative interest rate writings. Volatility will also be seen in exchange rates due again to central bank adjustments. Acclimation since the 1971 free float generally lasts 1 – 2 years and viewed from 1990’s Inflation Targeting, QE, Plaza and Louvre agreements. The ECB began its journey to negative rates in September 2014, the current month of March enters 15 months.
The current corridor system in Switzerland is the same old story, borrow low and lend high as Debt Register Claims to Saron contains a 16 bps spread, 64 bps wide from Saron to 1 month CHF Libor and 32 bps from Saron to 3 month Libor. The misalignment is seen in 1 month Libor and Saron as the SNB generally conforms to a 50 bps policy to 3 month Libor.
What dictates Saron rates, levels and targets is the 2 year monthly average as 32 bps exist between the 1 and 2 year and 12 bps from the 2 – 3 year. The 1 year average is positive as current price is above at minus 0.725 or 0.275. The 1 year average is located at minus 0.729 or 0.271 while the 2 year is located at minus 0.403 or 0.59 and current price is below. Structural adjustments are seen as much in the averages as in the switch to negative interest rate policies. The ECB for example after 4 cuts since June 2014 still sees yearly averages severely oversold as 4 drops to Eonia failed to see the yearly averages maintain pace with the current market price. Oversold in Saron is seen in 3, 5 and 7 year averages but particularly in the 5 and 7 year averages as targets are found at 0.63 and 0.54 or minus 0.36 and minus 0.45. Excluding the 5 and 7 year, overall targets range from 0.24 to 0.45. Only the 8 year average is positive at 0.1145. To offer what targets mean, the 10 year yield trades minus 0.408 or 0.59. The 2 year Confederate bond trades minus 1.06 or positive 0.06, a 53 bps spread.
What Saron, Debt Register Claims and negative rates means for CHF is a severe oversold situation and oversold by many years.
CHF/USD = 1.0070
USD/CHF = 0.9961
CHF/EUR = 0.9149 EUR/CHF 1.0929
CHF/GBP = 0.7205 GBP/CHF 1.3878
CHF/AUD = 1.3976 AUD/CHF 0.7154
CHF/NZD = 1.4957 NZD/CHF 0.6685
CHF/CAD = 1.3641 CAD/CHF 0.7330 JPY/CHF = 0.0087.
CHF/JPY = 1.1384 USD/CHF and CHF/USD in post 2008 crisis remains a badly priced, mis priced, over and under priced currency pair. Viewed from its main counterpart in EUR, its not terrible yet severely oversold from AUD, NZD, CAD and off kilter from GBP.
Brian Twomey, Inside the Currency Market, btwomey.com