FX Watch – Stealth intervention by the SNB?

by: Georgette Boele

150817-FX-Watch-CHF.pdf (243 KB)
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  • Swiss franc weakness
  • There are signs of SNB stealth intervention
  • More monetary policy easing is needed to support the economy
  • Our new year-end EUR/CHF forecasts for 2015 and 2016 are 1.10 and 1.15 respectively

Swiss franc weakness

Since the middle of July the Swiss franc has been the weakest major currency. Versus the euro it lost more than 4.5% and versus the US dollar around 1.6%. Is this weakness market-determined or has the invisible hand of the Swiss National Bank (SNB) helped the move? Below we argue the Swiss franc weakness has not come naturally by assessing changes in the balance sheet of the SNB.

Behaviour of sight deposits…

In general, intervention in currency markets often coincides with a sharp increase in sight deposits. This is reflected by the close relationship between the increase in sight deposits and the increase in FX reserves at the SNB (see graph above). For example in August 2011, the Swiss franc rallied towards parity versus the euro. The SNB reacted by introducing the floor in EUR/CHF at 1.20 in September 2011. In this period there was a substantial increase in sight deposits. Another example is that after the SNB abandoned the floor in EUR/CHF in January of 2015, sight deposits also increased.

150817 - FX Watch

A steady increase in sight deposits at the SNB…

Since April of this year sight deposits at the SNB have increased at a steady rate. They are now about 4% higher than they were in April. These sight deposits are a major instrument to finance currency interventions. How can they increase? First, an increase in the level of sight deposits could indicate that the SNB has provided liquidity through short-term money market transactions. Second, they can also increase as a result of Swiss franc inflows which are deposited at the central bank.  This steady increase in FX reserves could mean the following. First, the SNB could have been intervening at a modest pace to prevent that EUR/CHF moved lower at the height of the Greek saga, while pushing EUR/CHF higher when sentiment has started to improve. Second, the steady increase in sight deposits could also be a sign of CHF inflows that are deposited at the central bank. Such inflows would result in upward pressure to the Swiss franc. Intervening in currency markets to weaken the Swiss franc is a strategy to alleviate this pressure.  This morning total sight deposits increased only slightly.

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…and more evidence of currency intervention…

The latest SNB FX reserves data from July show a total increase of 15bn CHF compared to June. Most of this increase is the result of valuation effects due to the weakening of the Swiss franc. However, around 1/3 of the increase in total FX reserves can’t be explained from currency movements and, therefore, are rises in the volume of reserves. This suggests that the SNB has intervened in currency markets in July to weaken the Swiss franc. Chairman Thomas Jordan said on 25 June that the Swiss franc is currently significantly overvalued. Monetary policy is guided by the SNB’s willingness to take an active role in foreign exchange markets and apply negative interest rates.

More monetary easing would be helpful

We judge that the current financial conditions remain too tight for the economy and that more monetary stimulus is needed. Even though, the SNB has not aggressively eased monetary policy in the form of lower interest rates or QE, it has been able to arrest the rise of the Swiss franc versus the euro. There are signs that EUR/CHF is steered towards 1.10 and eventually above. As a result of these new developments we have adjusted our forecasts in EUR/CHF for year-end 2015 and 2016 to 1.10 and 1.15 respectively.