All eyes remain focussed on Greek developments today as the country vacillates towards acceptance of further austerity measures in order to gain the Troika’s (EU, IMF, ECB) approval for a second bailout for the country. The stakes are high with a potential disorderly default and Eurozone exit on the cards should no agreement be reached.
Against this background market nervousness is intensifying as reflected in the slippage in global equity markets and drop in risk assets in general overnight. The data and events slate today includes an RBA policy meeting and German industrial production, but neither of these will be significant enough to deflect attention and calm fraying nerves as markets await further Greek developments.
Contrary to many commentaries, the fall in EUR/CHF cannot be attributed to higher risk aversion (it has had a low correlation with my Risk Aversion Barometer over recent weeks). Instead, EUR/CHF is another currency pair that is highly correlated with interest rate differentials. Indeed, its high sensitivity provides a strong explanation for the drop in EUR/CHF since mid December 2011. This move has occurred despite an improvement in risk appetite over this period, a factor that would normally be associated with CHF weakness.
The implied interest rate futures yield advantage of the Eurozone over Switzerland has narrowed by around 47 basis points since mid December 2011. This is a problem for the Swiss National Bank, who will increasingly be forced to defend its 1.20 line in the sand for EUR/CHF. However, given that the drop in EUR/CHF has closely tracked yield differentials, any intervention is likely to have a limited impact unless there is renewed widening in the yield gap.