150817 fx watch chf

FX Watch

Group Economics Macro & Financial Markets Research Georgette Boele +31 20 629 7789

Stealth intervention by the SNB?

17 August 2015 • • • •

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 First, an increase in the level of sight deposits could indicate

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 marketdetermined 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

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

in the balance sheet of the SNB.

when sentiment has started to improve. Second, the steady increase in sight deposits could also be a sign of CHF inflows

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

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.

SNB stealth intervention?

Sight deposits in bn CHF

EUR/CHF

465

1.10

460

1.08

Increase in sight deposits signal FX intervention

455

1.06

In in bn CHF

450

1.04

600

445

1.02

500

440 Mar 15

of 2015, sight deposits also increased.

400

May 15 Sight deposits (lhs)

300

Jul 15

1.00 Sep 15

EUR/CHF (rhs)

200 Source: Bloomberg

100 0 11

12 FX reserves (lhs)

13

14

15

Sight deposits (lhs)

…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

Source: Bloomberg

is the result of valuation effects due to the weakening of the Swiss franc. However, around 1/3 of the increase in total FX

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?

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

2

Stealth intervention by the SNB? - 17 August 2015

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.

Sight deposits explained In order for a bank to maintain its solvency, it must have sufficient liquidity at all times. A bank’s most liquid assets are sight deposits held at the SNB, since they can be used immediately. Domestic banks hold sight deposits to meet minimum reserve requirements. The level of sight deposits influences activity and interest rates on the money market. The SNB provides liquidity through short-term money market transactions and thereby increases the amount of banks’ sight deposits held at the SNB. Source: www.snb.ch

3

Stealth intervention by the SNB? - 17 August 2015

Find out more about Group Economics at: https://insights.abnamro.nl/en/ This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer.

No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such n i formation. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof.

Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you andyour investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product 窶田onsidering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. ﾂｩ Copyright 2015 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").