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Weekly SNB Interventions and Speculative Positions: Back to 2.4 bn Intervention per Week

Headlines Week April 10, 2017

We were arguing in the previous months, that the EUR/CHF is trending towards parity.

There are three reasons:

  1. Continuing SNB interventions
  2. Strengthening Swiss local demand, as also visible in the GDP release.
  3. Speculators increase their dollar shorts against Euro and reduce them against CHF.

The tendency of point 3 had been interrupted when the ECB appeared to be less dovish.

FX Last Week:

Low Eurozone inflation let the euro fall again versus both dollar and Swiss franc. The EUR/CHF ended at 1.0680 for the week.

At the End of march, Eurozone inflation data was released. Core inflation has even fallen from 0.9 to 0.7%. Therefore a ECB rate hike will not come soon.

This implies that the EUR/CHF may fall towards parity in the next two years. The SNB might allow this because of the positive developments in Swiss internal demand mentioned above.

 

 

Euro/Swiss Franc FX Cross Rate, April 10

(see more posts on EUR/CHF, )
Euro/Swiss Franc FX Cross Rate, April 10

Source: markets.ft.com - Click to enlarge

Eurozone Core Consumer Price Index (CPI) YoY, February 2017.

SNB sight deposits

Swiss private investors do not export their massive trade surplus with purchases assets in foreign currency, apparently because valuations of stock markets are too high and bond rates are too low still.

As consequence the SNB intervenes and takes the risk that private investors do not want. With this measure she either risks its bankruptcy or – over the long-term – she deviates from its mandate to avoid inflation. The last time she realized that was in January 2015, when the peg broke.

We should remind that the EUR/CHF is clearly higher than the 0.90 that we expect in a couple of years – in the case of a combination of inflation and recession.

Intervening at elevated exchange rates – buying euros at 1.08 or dollars at 1.00 – is risky. It obliges the SNB to accumulate owners’ capital – for example with dividends and coupons. Thinking that stock markets will always go up, is an illusion.

Last week’s data:
The SNB intervened for 2.4 bn. This is a movement back to the weekly intervention trend.

Change in SNB Sight Deposits March 2017

(see more posts on SNB sight deposits, )
Change in SNB Sight Deposits March 2017

Source: SNB - Click to enlarge

 

Two Innings of Swiss Franc Appreciation

Two Innings of Swiss Franc Appreciation

George, Do you still believe in Inflation game ? ( eur/chf - 0,9 ?) How about short term prediction ( a month, year ? ) Regards, Mark

    I have no doubt that the EUR/CHF (and also the USD/CHF) will go to 0.90. But there are factors that have a deflationary effect and delayed this currency movement. The most important factors are:
    • Ageing and increased saving during the years before the pension: The Eurozone is currently following Japan; this means temporarily low inflation. But finally there will be a shortage of labor and rising prices. Switzerland will follow only later - in particular because the Swiss import the needed labor.
    • Productivity increases in China or other Asian economies, when people move from rural areas to the cities and provide manufactured goods for advanced economies. This "core theme" from Michael Pettis is still happening today, it should end in about 20, maybe 30 years.
    • Productivity increases that cannot be not measured in terms of GDP (remember that productivity=GDP/hours worked). This happens when you create better company processes without the need for investment (which again is part of GDP) - thanks to the internet and computer-driven economy. Switzerland is one of the leaders in improving processes - last but not least, because of the high labor costs..
    • The Eurozone is still far from full employment, in particular in the Southern countries, so salary increases are still low. This item is quite important because it implies that inflationary pressures and rate hikes may happen in Switzerland first
In my original thesis, I took a simple assumption, namely the typical business cycles of seven years. But I ignored that these deflationary factors delay the second part of the game, the inflation game. Look at Japan, then you see how deflationary pressures can persist in an ageing, but not yet over-aged society. I would hence adjust my estimate to 20-25 years, instead 7. source post - Click to enlarge

Speculative Positions

Speculators were net short CHF in January 2015, shortly before the end of the peg, with 26.4K contracts. Then again in December 2015, when they expected a Fed rate hike, with 25.5K contracts.

The biggest short CHF, however, happened in June 2007, when speculators were net short 80K contracts. Shortly after, the U.S. subprime crisis started. The carry trade against CHF collapsed.

The reverse carry trade in form of the Long CHF started and lasted - without some interruptions - until the peg introduction in September 2011.

In mid 2011, the long CHF trade became a proper carry trade - and not a reverse carry trade anymore - because investors thought that the SNB would hike rates earlier than the Fed.

 

Last data as of April 4:

 

In the last week, speculators reduced their CHF net short position to 13K contracts (against USD).

Speculative Positions


Choose Swiss Franc for CHF Commitment of Traders

source Oanda

 

 

Date of data (+ link to source) avg. EUR/CHF during period avg. EUR/USD during period Events Net Speculative CFTC Position CHF against USD Delta sight deposits if >0 then SNB intervention Total Sight Deposits Sight Deposits @SNB from Swiss banks “Other Sight Deposits” @SNB (other than Swiss banks)
07 April 1.0696 1.0648 US GDP release -13825X125K +2.4 bn. per week 564.1 bn. 476.2 bn. 87.9 bn.
31 March 1.0709 1.0754 Eurozone core inflation only at 0.7% -16392X125K +1.6 bn. per week 561.7 bn. 475.1 bn. 86.6 bn.
24 March 1.0718 1.0786 Fed meeting -11979X125K +2.9 bn. per week 560.1 bn. 476.3 bn. 83.8 bn.
17 March 1.0726 1.0699 SNB meeting -8997X125K +1.8 bn. per week 557.2 bn. 470.9 bn. 86.3 bn.
10 March 1.0722 1.0587 ECB meeting -10016X125K +2.1 bn. per week 555.4 bn. 467.4 bn. 88 bn.

For the full background of sight deposits and speculative positions see

SNB Sight Deposits and CHF Speculative Positions

George Dorgan
George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on SeekingAlpha.com and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.
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