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
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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
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Stealth intervention by the SNB? - 17 August 2015
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