The ECB will hold the second refinancing operation today, the results of which will be published soon after 0900 GMT. Yesterday refinancing operation, amount allotted dropped once again, to EUR67bn from EUR85bn.
For FX markets, the refinance operation is being closely watched for its potential impact on EURCHF. Given that the last major round of intervention by the SNB coincided with the allotment date of the previous 12-month refinancing operation, markets are braced a similar move today, though EURCHF at present is probably trading at levels the SNB remains comfortable with.
We believe foreign borrowers are finding it difficult to obtain CHF liquidity at present, as Swiss banks have sharply cut their credit lines to external borrowers by more than 30%, as opposed to increasing them for the domestic sector. Total borrowing by external counterparties is down to CHF113bln as of July 2009, almost 39% below peak levels seen before the crisis struck. Domestic credit is being given priority over the external sector, causing the sources and volume of credit available for foreign lending to be reduced - which also means less sales of the Swiss franc.
As funding in CHF becomes difficult, borrowers understandably conserve their credit lines, and this has significant implications for the CHF. In two episodes from 2000-2003, and the recent credit crisis, foreign borrowers cut back sharply on usage of their CHF credit lines. This means less CHF was sent overseas and allowed the CHF to appreciate in real terms on both occasions. So long as economic prospects remain weak and credit hard to come by, foreign borrowers will continue to sparingly use their CHF credit, and the lack of selling pressure will translate into franc strength.
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