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Weekly SNB Intervention Update: SNB Selling FX Positions

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.

FX

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

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.

 

French Elections: May 2017

The pro-European politician Macron has won the French elections. He is a politician that – similar to Hollande four years ago – promises economic improvements, more investment, more jobs.

As opposed to Hollande, he also advocates limitations on salaries and less social protection for workers, to restore France’s competitiveness.

Mostly probably he will fail – similar to his predecessor because the French economic reality is simply different.

His success moved the EUR/CHF up to 1.0980, mostly caused by FX speculators.

But serious investors – i.e. not FX speculators – did not follow the political event. The SNB had to intervene for 1.9 bn francs.

Serious investors are far more interested into monetary policy and not in politics. And there things remained clear for us: Draghi continues to be dovish, no ECB rate hike in sight.

And so the EUR/CHF must go down again.

 

Headlines After the Trump Election

We explained the Trump reflation trade, where the Swiss Franc acts as the usual inflation hedge against the obviously inflationary policies of Trumpeconomics.
Trump is about tax cuts – i.e. a fiscal deficit up to 10%, and about protectionism. Trump would restrict global trade and push up U.S. wages.

According to Lars Christensen Trumpeconomics is also about monetary stimulus: Trump would push for a more jobs and a dovish Fed, same as his fellow Republican Nixon did. He could even replace the “hawk” Yellen.

Long-term oriented investors have realized that. They bought Swiss Franc cash as inflation hedge or Swiss Franc pharma stocks that profit on less pharma regulation under Trump .
They got the francs far cheaper than during the coming inflationary cycle, because the SNB sold them at cheap prices. When exactly inflation will start is still open, Bill Bonner asks “Too early for an inflation Bet?”

We see the euro at 0.90 CHF and the dollar at 0.80 – 0.70 CHF during the inflation period, but we are still one or two decades away. (See The two phases of CHF appreciation). During the period of low inflation in between,  both dollar and stocks may improve.

Sight Deposits: The SNB intervenes for 2.9 billion CHF after 4.8 bn. last week. Rising stock markets let her believe that she can earn enough until  the inflation period starts, for us the end-game of  the dollar.

FX: Both SNB and speculators are short CHF.and they are slowly driving the euro towards 1.08.

Headlines October, 2016

Sight Deposits: +1.1 billion CHF

FX: The EUR/CHF is still in the SNB intervention range between 1.08 and 1.0850.

Headlines September 2016

Sight Deposits: +1.6 billion CHF

FX: Unusual price movement caused by SNB Q3 Window Dressing? EUR/CHF rises in one day from 1.0819 to 1.919 by 100 bips.

Dovish Fed, “The case for a hike had strengthened, Yellen said, but still the consensus to hike was not there”. As usual, both EUR and USD depreciated against CHF.

Headlines August, 2016

FX: Not convincing U.S. jobs numbers, that may delay a Fed rate hike.

Sight Deposits: The SNB had to intervene for 4.4 bln.

Headlines July, 2016

FX: US Q2 GDP only +1.2%

Speculative Position: Speculators reduced their long CHF position to 946K contracts.

EUR/CHF at 1.0868 and EUR/USD at 1.1058

Headlines June 04, 2016, After Brexit

Interventions:
The SNB intervenes for 6.3 bn francs in the week ending last Friday, the week one after Brexit.

20% of the interventions into stocks: The SNB has now a 20% equities share, this implies that the bank pumped 2 billion francs in global (non-Swiss) stock markets.

FX: Unexpectedly for us, the SNB raised the intervention level to 1.0850. Apparently the central bank converted GBP->CHF flows into GBP->EUR flows – via EUR/CHF purchases.

Speculators: are long CHF 10K contracts against USD versus 6.3K contracts last week. (CFTC data)

Intervention levels are too high, in particular on dollar purchases

The SNB converts a certain percentage of the inflows into USD to keep up the USD share at around 33%. Dollar purchases at 0.97 CHF are far too expensive in a historical (e.g. 0.75-0.80 CHF in 2011) and future perspective (when global inflation comes back). Similar to the EUR purchases at 1.40 in 2010, dollar purchases at elevated levels of 0.97 can pave the way for a SNB bankruptcy.

Headlines June 20, 2016, Before Brexit

FX: CHF remains strong. Reasons are:

  1. Brexit fears,
  2. the weak US Payroll report and the FOMC reaction to it: U.S rates to remain low for longer
  3. A strong recovery of the Swiss economy, visible e.g. in the Swiss Manufacturing PMI

Sight Deposits: SNB intervenes for 2.6 billion francs.

Speculative position: Speculators switch to long CHF and short USD.

Headlines May 2016

Speculative position: Reduction in CHF Longs against USD:  +3900 compared to +9265 x 125K contracts still at the end of April.
Sight Deposits: SNB intervenes for 2.9 bn. CHF in one month. This is a slow-down against before but still strong.
FX: The EUR/CHF is finally weakening falling downwards from initially 1.11. The dollar has had a strong momentum and rose to 0.98.

Headlines April 2016

Speculative position: Speculators are even longer CHF:  +9410x 125K contracts.
Sight Deposits: SNB intervenes for 6.4 bn. CHF in only three weeks. Sight deposits (aka debt) are rising by 1% per month, this is 12% per year. The SNB can never achieve such a yield on investment. This is the higest level since January 2016. Why the SNB is driving the Swissie so high is a question, given that both real money and speculators are long.
FX: EUR/CHF rose over 1.09 and touched 1.10. The dollar around 0.97 CHF.

Headlines March 2016

Speculative position: Strong shift to CHF long:  +4967x 125K contracts after the Fed reduced their expectations of rate hikes for this year.
Sight Deposits: SNB intervenes for 6.1 bn. CHF during the month of March. This is the higest level since January 2016.
FX: EUR/CHF rose over 1.09 and touched 1.10. As I expected last week, the EUR/CHF was not reached. The dollar is getting slowly weaker, at 0.96 CHF currently.

February 2016

Interventions of 5.1 bn. CHF is very high. The speculative position against CHF was getting smaller and smaller.

January 2016

Interventions +4.8 bn. per month.

Headlines December 2015

End December: The SNB seems to have sold foreign FX, because sight deposits have fallen by 0.5 billion CHF in December. However, many people withdraw cash at the end of year, this reduces sight deposits at Swiss banks and therefore also sight deposits at the SNB. According to the SNB, this is for tax reasons.

The speculative position USD against CHF has evaporated in the meantime. Traders are net long CHF again.

Early December: Height of a speculative position against euro and CHF (short 24K contracts on Wednesday). Draghi disappointed. And logically the speculative position against EUR and CHF started to unwind. For the first time in months, sight deposits fell. The SNB was able sell currency reserves, most probably dollars, while the speculators had to buy francs.

For Older Headlines see next page

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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