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Weekly SNB Intervention Update: Sight Deposits and Speculative Position


 

FX

The EUR/CHF remained over 1.10 in the last week, thanks to hawkish comments from ECB president Draghi.

Headlines Week July 17, 2017

On June 27, Draghi told the audience at the annual ECB Forum that transitory factors were holding back inflation.

This has boosted the euro against both USD and CHF.

Our opinion, however, is that this “transition” is very long, possibly comparable to the Japanese deflation/ low-inflation over decades.

At the latest from December/January 2017/2018, the EUR/CHF must go down again,  See the following:

 

 

Euro/Swiss Franc FX Cross Rate, July 17

(see more posts on EUR/CHF, )
Euro/Swiss Franc FX Cross Rate, July 17

Source: markets.ft.com - Click to enlarge

Why must EUR/CHF go down again?

The graph shows that the European Core Consumer Price Index has spiked.Many investors also hoping that the ECB will start reducing their bond purchases.

Speculators are now long EUR against both USD and CHF.

We see core inflation  at 1% to 1.3% for the whole year. Headline figure should dive to 1% or lower, once oil price changes are reflected. This should happen in December or early next year.

Eurozone Core Consumer Price Index (CPI) YoY, May 2017 (flash)

(see more posts on Eurozone Core Consumer Price Index, )
Eurozone Core Consumer Price Index (CPI) YoY, May 2017 (flash)

Source: Investing.com - Click to enlarge

SNB interventions nearly at zero

 

Data for the last weeks:

Interventions are near zero: Between 0.1 and 0.4 bn CHF in the last 3 weeks.

 

 

Background:

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.

Change in SNB Sight Deposits June 2017

(see more posts on SNB sight deposits, )
Change in SNB Sight Deposits June 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 July 11:

The net CHF position has risen from 0.1 short to 0.2 contracts long (against USD).

Speculators are long EUR against both USD and CHF.

Speculative Positions


Choose Swiss Franc for CHF Commitment of Traders

source Oanda

 

 

Date of sight deposits (+ 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)
14 July 1.1030 1.1429 +208X125K +0.2 bn. per week 578.9 bn. 482.7 bn. 96.2 bn.
07 July 1.0963 1.1377 -113X125K +0.1 bn. per week 578.7 bn. 486 bn. 92.7 bn.
30 June 1.0913 1.1353 Hawkish Draghi comments -4669X125K +0.4 bn.per week 578.6 bn. 490.0 bn. 88.6 bn.
23 June 1.0857 1.1160  -2982X125K +0.8 bn. per week 578.2 bn. 491.7 bn. 86.5 bn.
16 June 1.0880 1.1197 French parliamentary elections -14460X125K +1.0 bn. per week 577.4 bn. 482.0 bn. 95.4 bn.
09 June 1.0856 1.1240 -16555X125K +0.3 bn. per week 576.4 bn. 476.2 bn. 100.2 bn.

 

Background

FX Rates, Balance of Payments and Capital Flows

At the very basis you should understand that FX rates are driven by the balance of payments for this currency, i.e. by inflows of capital or by not existing capital outflows when the country has a current account surplus. These non-existent outflows are very important for Switzerland, a country with a big trade and current account surplus.  Capital inflows (or non-existent outflows) can be invested in different types of assets like real estate, stocks, bonds, physical cash or in cash on bank accounts.
SNBFX interventions
When investors do not want to buy enough foreign assets for a given (potentially manipulated FX rate), then the central bank might do this instead. This is what we call FX interventions. They are financed with local currency, with the excessive capital inflows or “non existent outflows”. Very often the central bank considers the cash on bank accounts as “excessive”.

As opposed to the Bank of Japan, for example, the SNB buys assets denominated in foreign currency.


Sight deposits

are the equivalent of cash on Swiss bank accounts, when these banks have nothing else to do with this money than giving it to the central bank in the form of “sight deposits of banks”.

They are currently the by far most important means of financing for SNB currency purchases, for interventions. Sight deposits are assets for commercial banks, the Swiss confederation and other counterparties that deposit money at the SNB, but for the SNB they are liabilities, debt.

Sight deposits are always denominated in CHF. The SNB finances itself with Swiss Francs, while its assets are nearly all in foreign currency. When CHF appreciates, then the debt increases more than the assets. The assets lose their value. As consequence the central bank may lose its Owner’s Equity which may result in a central bank bankruptcy or a recapitalization by the Swiss state.
The IMF-compliant weekly monetary data release on the SNB website provides the recent developments in sight deposits. With this weekly delivery it gives an far earlier indication of SNB interventions than the relatively late releases of balance sheet or IMF data.

Currency in Circulation

Currency in the form of bank notes and coins is the second financing method, it represents the “traditional money printing” of central bank debt with the printing press. Nowadays this printing of debt in the form of bank notes is far less important than the electronic printing of SNB debt called “sight deposits”.

Money Printing

is the popular word for unsterilised central bank interventions that – at least for monetarists – paves the way for price inflation. In the following we concentrate on sight deposits as means of money printing, because currency in circulation changes far less than sight deposits. From October 2014 to October 2015, the SNB printed new bank notes of a total of 6 billion CHF but electronic money (sight deposits) rose by 100 billion francs (see the SNB balance sheet).

SNB intervention

 Sight Deposits of Swiss Banks and Other Sight Deposits

Sight Deposits of Swiss banks

They are part of M0, the monetary base: With the money multiplier effect, money on Swiss banks have a higher influence on Swiss lending and inflation. Therefore the two categories are separated. For monetarists, a big rise in Swiss sight deposits would be a bigger issue than the increase of the second item, which is:

“Other Sight Deposits”

are the ones of other counter-parties with an account at the SNB. These include loans from the Swiss confederation and federal authorities like the state pension fund (In German “AHV”). Other counter parties are insurances, private pension funds, settlement agencies, foreign banks, investment companies, hedge funds and foreign central banks and institutions. These other sight deposits are not part of M0, because they are not able to “multiple money” with loans to the public (no money multiplier effect).

Negative Rates on Sight Deposits

Since December 2014, sight deposits above the threshold of around 320 bn. are “punished” with negative rates (20 times more than the minimum reserves, visible in “compliance in %” on the monetary data). The punishment fee is currently 0.75%. Hence by End of November 2015, around 148 bn. CHF are concerned by the negative rates, while the 320 bn. are “exempted”.  Between November 2015 and April 2016, sight deposits increased by 22 bn. . Since the exemption level did not increase, all these 22 bn should be punished by 0.75%. The SNB achieved a profit of 333 million on negative rates only in Q1/2016.

 

The relationship between CFTC speculative position and sight deposits

Example: The data graph shows that real money went long 13.1 billion CHF during the week of Jan 15, 2015, but FX speculators were short CHF by 26444 x 125K contracts. Speculators got ripped off by real money. It is also visible that only in November 2014, the SNB started to intervene: delta sight deposits remained at zero before.


 

Detailed Table

This is the detailed table that shows how the SNB increased its debt and accumulated FX investments. The terms are explained in the sections above.

Weekly SNB Intervention Watch: Sight Deposits

Date
(+ link to source)
avg. EUR/CHF during periodavg. EUR/USD during periodEventsNet Speculative CFTC Position CHF against USDDelta sight deposits
if >0 then SNB intervention
Total Sight DepositsSight Deposits
@SNB from Swiss banks
"Other Sight Deposits" @SNB (other than Swiss banks)
14 July, 2017 1.10301.1429+208X125K+0.2 bn. per week578.9 bn.482.7 bn.96.2 bn.
07 July, 2017 1.09631.1377-113X125K+0.1 bn. per week578.7 bn.486 bn.92.7 bn.
End June, 2017 1.09131.1353-4669X125K+2.6 bn.per month578.6 bn.490.0 bn.88.6 bn.
End May, 2017 1.09121.1202-19785X125K+4.5 bn. per month576 bn.489.3 bn.86.7 bn.
End April 2017 1.08321.0895-17317X125K+9.8 bn. per month571.5 bn.479.5 bn.92.0 bn.
End March 2017 1.07091.0754Eurozone core inflation only at 0.7%-16392X125K+13.5 bn. per month561.7 bn.475.1 bn.86.6 bn.
End February 2017 1.06481.0570New record in Swiss trade surplus-8936X126K+15.4 bn. per month548.2 bn.470.2 bn.78.0 bn.
End January 2017 1.07181.0725US Q4 GDP only +1.9%-13644X125K+3.8 bn. per month532.8 bn.466.7 bn.66.1 bn.
End December 20161.07281.0467-10091X125K+1.5 bn. per month529.0 bn.466.3 bn.62.7 bn.
End November 20161.07491.0786Election of Donald Trump, Renzi loses referendum in Italy-24334X125K+9 bn. per month527.5 bn.457.6 bn.69.9 bn.
End October, 20161.08391.0920Strong US GDP Release-18700x125K
+1.1 bn. per month518.5 bn.451.9 bn.66.6 bn.
End September, 20161.08911.1230SNB intervenes at end Q3. Speculator follow.-5956x125K
+1.6 bn. per month517.4 bn.452.9 bn.64.5 bn.
End August, 20161.09611.1169Not convincing U.S. jobs numbers, that may delay a Fed rate hike.
+8208x125K
+4.4 bn. per month515.8 bn. 438.7 bn.77.0 bn.
End July, 20161.08681.1058US Q2 GDP only +1.2%
+946x125K
+3.9 bn per month511.4 bn 435.0 bn 76.4 bn
End June 20161.08801.13Brexit: Interventions for 10.8 bn CHF+10867x125K
+13.4 bn per month507.5 bn 430.3 bn 77.2 bn
End May, 20161.10651.1365Reduction in CHF long, smaller SNB interventions+3954x125K
+2.9 bn per month494.1 bn 420.7 bn 73.4 bn
End April 20161.09341.1340Long CHF vs. USD still increasing, SNB intervening at high levels+9410x125K
+7.5 bn per month491.2 bn 423.9 bn 67.3 bn
End March 20161.09291.1142Speculators shift to CHF long after Fed reduced rate expectations+4967x125K
+6.1 bn per month483.7 bn 420.2 bn 63.5 bn
End Feb 20161.10131.1105SNB interventions for 5.1 bn CHF-2321x125K
+5.1 bn per month477.6 bn 418.0 bn 59.6 bn
End Jan 20161.09421.0866Some distortion in sight deposits with the End December "tax effect".-4506x125K
(Short CHF)
+4.8 bn per month472.7 bn 403.1 bn 69.2 bn
End Dec,20151.08281.0900With "dovish" Fed hike, short CHF pos. evaporates, SNB selling+3564x125K- 0.5 bn per month467.9 bn 403.8 bn 64.1 bn
End Nov 20151.08401.0735Speculation about lower Swiss neg. rates: high spec. pos. against CHF-15329x125K+1 bn per month468.4 bn 401.7 bn 66.7 bn
End Oct 20151.08571.1004Draghi threads with more QE, SNB with lower neg. rates+1499x125k
+2.1 bn per month467.4 bn 401.3 bn 66.1 bn
End Sep20151.09221.1237Greek elections and Volkswagen neg. for Euro-2715x125k
+1.4 bn per month465.3 bn 399.1 bn 66.1 bn
End August 20151.081.1250China crisis negative for CHF and pos. for USD (see more)-12597x125k
(CHF short)
+3 bn per month463.9 bn 396.0 bn 67.9 bn
July 17, 20151.04261.0904Deal with Greece achieved+3100x125k
(CHF long)
+0.8 bn each week460.9 bn 396.8 bn 64 bn
End June1.04001.1100Greek Referendum +6900x125k+3.4 bn per month457.9 bn 391.1 bn 66.7 bn
End May 20151.04051.1160Ascent of EUR/USD with rising German inflation+8300x125k+5.5 bn per month454.5 bn 380.5 bn 73.5 bn
End April 20151.031.09Weak US GDP let Euro and CHF rise.+1300x125k+6 bn
per month
449 bn 384 bn 65 bn
End March,20151.06021.0831Euro falls thanks to Greek and Draghi fool game (GR= 1.5% of EU GDP)+706x125k0443 bn 379.3 bn 64 bn
End Feb, 20151.06171.1353Greeks continue fooling Germany-5085x125k
(CHF short)
0443 bn 383.6 bn 59.7 bn
Jan 30, 20151.041.1340Greek crisis again: Run to safety continues-7373x125k+14.8 bn per week443 bn 383.3 bn 59.7 bn
Jan 23, 20150.991.1340Neg. CHF rate of 0.75% introduced-9809x125k+26.2 bn per week428.2 bn 365.5 bn 62.7 bn
Jan 16,20150.99881.1578End of EUR/CHF peg-26444x125k
(before end peg)
+13.1 bn per week402 bn 339.6 bn 62.4 bn
Jan 9,20151.20091.18ECB QE Onset, Brent: 47$-24171x125k2.4 bn per week388.9 bn 329 bn 59.7 bn
End Dec,20141.20201.2099Rouble crisis, Brent: 54$, neg. CHF interest 0.25%-16545x125k16.5 bn per month386.5 bn 327.7 bn 58.8 bn
End Nov, 20141.20261.2436Gold referendum,Brent:69$-23424x125k3.6 bn per month370.6 bn 319 bn 51.4 bn
End Oct, 20141.20281.2525Brent: 84$-20283x125k0367 bn 310 bn 56.4 bn
End Sep, 20141.21151.2632Brent:91$-12557x125k0368 bn 310 bn 58 bn
August, 20141.20601.3128Brent: 101$-13039x125k0367 bn 310 bn 57 bn
July 20141.21501.2832ECB QE Talk taking effect on markets-11764x125k0368 bn 310 bn 58 bn
June, 20141.21581.3596First ECB easing-6813x125k
(CHF spec.pos turns neg.)
0368 bn 301 bn 67 bn
May, 20141.21921.3642+13703x125k0367 bn 304 bn 63 bn
End Q1, 20141.22271.3703Ukraine crisis+14819x125k0368 bn 316 bn 52 bn
End Q4, 20131.23031.3588US recovery despite gov. shut-down+10889x125k0364 bn 319 bn 45 bn
Previous Record High1.20471.2927Nov2012:-3367x..
June2013:-28972x
12 bn per month
total 256 bln. CHF
373 bn
(Nov 2012)
321 bn
(June 2013)
March 16, 20121.20401.3300Temporary low in sight deposits-19812x125k-4 bn (SNB selling Euros) 217 bn 159 bn 58 bn
Dec, 20111.20401.2948Markets perceive higher floor thread-10978x125k-26 bn (SNB selling Euros) 221 bn 180 bn 41 bn
Sept 16, 2011 (first record)1.21551.2940After establishment of 1.20 floor+5400x125k
(CHF long despite floor)
58.4 bn (sept 2011)247.4 bn 206 bn 42 bn
August 20111.181.4379US Downgrade, ECB intervention+9342x125k159 bn (Aug 2011)189 bn 164 bn 25 bn
July 20111.121.4396SNB absorbs liquidity with SNB bills+7877x125k-71 bn (SNB sterilizes via SNB bills) 30 bn
(Thirty)
May/June 20101.401.2306SNB abandons interventions-12810x125k24 bn 101 bn
May 02 20091.51641.41First high during fin. crisis-4922x125k77 bn
Remarks

Italic print: Recent data estimated based on SNB balance

Italic print: Recent data estimated based on SNB balance

Italic print: Recent data estimated based on SNB balance

Full list of Swiss institutions with sight deposits

Italic print: Recent data estimated based on SNB balance sheet of October 2014

 

Q&A

Roger: Are there other explanations than interventions for increased sight deposits?

George Dorgan: There are two means of financing for current interventions:

1) Sight Deposits (electronic printing)

2) Bank notes (“traditional” money printing)

So when cash is converted into sight deposits at the SNB, then this may happen without interventions. But sight deposits increase.

Roger: The SNB buys in any case, even if the rate is high. Why?

George Dorgan: Yes you are right. But interventions at too high levels, is a potential risk for SNB’s solvability. But why does she do it?

1) If the SNB sells the EUR/CHF or does not buy at all, then the EUR would move downwards. The bank does not like this.

2) The SNB wants to support the carry trade, the upwards trend of EUR/CHF.

The conclusion is that the SNB will sell euros from a certain level. In an earlier post, I thought they sell at 1.10 but I got wrong, for now…

Remember that the SNB sold euros in early 2012 so that the euro went slowly towards 1.20.

Roger: Is it possible that money isn’t credited to an account instantly but after a few days, right? Last week the deposits increased. This could be because of interventions in the last week or the week before, right? But in the last two weeks the Euro-Franc exchange rate was pretty high.

George Dorgan:

Speculative positions against CHF (CHF short) may be higher than CHF sight deposits (CHF Long). The CFTC position is only a part of the total spec position.  Brokers and foreign banks hedge some of their client EUR long positions with SNB sight deposits or indirectly via Swiss banks like UBS. When and how much they hedge, depends. As January 15th shows, banks are usually not completely hedged.

You might get confused with this answer, read more here why sight deposits can be viewed in two ways, depending who creates them, the central bank SNB or the commercial banks that deposit funds.

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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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19 comments

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  1. Newreader

    Hello George,
    thank you for your interesting blog.
    Relating to your “Latest SNB Intervention Update: Weekly Sight
    Deposits” there is one thing I do not understand. What is the interest
    rate on deposits held by commercial banks by the SNB. In other words,
    does it pay the banks to hold money at the SNB or it is better to go to
    the market? Are the SNB’s FX interventions sterilised, if so at what
    rate? Is there any corridor for MM rates in Switzerland? If so what
    rates does it consist of?
    Your response would be very appreciated.
    Kind regards,
    Piotr

  2. GeorgeDorgan

    Sorry for the late response.
    Similar to the Bank of Japan, the SNB has a long tradition of paying zero on its sight deposits, the Fed currently pays a little more.
    With the move into negative rates, sight deposits above a certain threshold must pay negative rates.

    “Better to go to the market” is no alternative, because the LIBOR market is empty. Any Swiss bank has too much money. So if you have money then nobody wants it, even more you must pay to give the money to somebody (negative LIBOR rates).

    FX interventions are not sterilized in the sense that they cannot be used for the multiplier effect, that they may prop up lending. The main method of financing are sight deposits. SNB bills are sterilized, but they do not exist any more since 2011.
    The latest target LIBOR is about -0.75%, but as said everybody has enough liquidity.

  3. rueffallais

    Hello,
    It is very confusing in my mind , those increase of sight deposits are coming from where ?
    These sight deposits are used to maintain the  peg ?
    Thanks for your explanation

  4. Newreader

    GeorgeDorgan 
    Hi,
    thank you for your response. 
    I understand that banks are “over-liquid” and don’t need money for lending or liquidity management.

    But actually I was thinking about such a possibility for arbitrage for banks: to borrow on the market at -0,75% and to deposit with the SNB at 0%?

  5. GeorgeDorgan

    The way is the following:
    1) Wealthy investors like Russian oligarchs or rich Greeks want to save their money against currency collapse or confiscation. Their main scope is typically to preserve wealth
    2) They deposit the money on a Swiss bank account in CHF. This would be a “sight deposit at the Swiss bank”.

    3) The bank does not know what to do with the funds, it does not lend it.
    4) Instead it deposits it at the central bank, the so-called “sight deposits at the SNB.”
    5) The quantity of sight deposits depends on the price of CHF: If CHF is expensive for foreigners then they may choose the dollar instead to save their money. If CHF is cheap like EUR/CHF =1.20 then it is more.

  6. Roger

    It is true that it’s possible that money isn’t credited to an account instantly but after a few days, right? Last week the deposits increased. This could be because of interventions in the last week or the week before, right? But in the last two weeks the Euro-Franc exchange rate was pretty high. Does this mean the SNB buys stuff in any case / even when the Euro-Franc exchange rate is pretty high?
    Another question: Are there other explanations than interventions for increased sight deposits?

    1. George Dorgan
      George Dorgan

      Yes, the SNB buys in any case, even if the rate is high. Why?
      1) If the SNB sells the EUR/CHF or does not buy, the EUR would quickly move downwards.
      2) The SNB wants to support the carry trade, the upwards trend of EUR/CHF.

      1. George Dorgan
        George Dorgan

        Another question: Are there other explanations than interventions for increased sight deposits?

        There are two means of financing for current interventions:
        1) Sight Deposits (electronic printing)
        2) Cash (“traditional” money printing)

        So if cash is converted into sight deposits, then this may happen without interventions.

  7. Anon

    Hope you keep this blog updated, very good information to put through my head

  8. Julien

    Your website is really nice for anyone looking for detailed information on the SNB policy, thanks for keeping it updated.

    I have a question on your post, I found it clever to show the correlation between CFTC Positions and SNB FX interventions, but I don’t find the correlation particularily convincing. Couldn’t one find another variable to “predict” SNB interventions ? To put it differently, isn’t there any others indicator that could help “predict” SNB interventions ?

    Julien

    1. George Dorgan
      George Dorgan

      Sight deposits are the earliest indicator of interventions apart from market chatter.
      Be aware that in most cases there is no correlation of CFTC and sight deposits. The aim of the graph is to show when one should not be short CHF.

      1. Julien

        ok thanks.

        I was thinking from your graph CFTC positions were one of the factors the SNB could look at when deciding to intervene or not, now I get what you wanted to show. Ok for market chatter, thanks.

  9. Niche

    50 year Swiss gov. bond now yielding 0.223%…

    1. George Dorgan
      George Dorgan

      A big part of negative or near-zero yield is the expectance that CHF will be stronger than EUR or USD.

  10. Meier

    SNB now has third-highest FX reserves (China and Japan highest and second-highest. Previously Saudi Arabia was third-highest but its reserves position declined due to the decline in oil prices.

    https://en.wikipedia.org/wiki/List_of_countries_by_foreign-exchange_reserves

    1. George Dorgan
      George Dorgan

      The Wikipedia page could need an update, because they include gold in the Foreign exchange reserves. It is a difference if you own gold or fiat as reserve.

  11. Jeremy

    Hi guys – thanks for the great posts.
    Just wondering when did you change your outlook that things were going to head down (to parity) before they would head back up again?

    Also noting that you had previously mentioned about the bands that the SNB is comfortable where the EUR sits. I.e. 1.068 was at the low end of their comfortable range.
    “Comfortable” due to their assets being mostly denominated in EURs; assets reduce, then relative debt increases.

    Looking forward to understanding

  12. Mark

    George,

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

    Regards
    Mark

    1. George Dorgan
      George Dorgan

      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, not 7.
      source post

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