Weekly Sight Deposits and Speculative Positions: SNB interventions are rising again

Headlines Week March 27, 2017

We were arguing in the last weeks, 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.

Point 3 was not fulfilled last week.

FX Llst weeks:

The EUR/CHF suddenly appreciated with the ECB meeting, when Draghi seemed less dovish than before. The rate rose from the previous 1.0650 “intervention level” to over 1.0750. With the SNB meeting, the EUR/CHF receded again a bit. But as we see below, the FX rate is still at the mercy of the Swiss central bank.

Euro/Swiss Franc FX Cross Rate, March 27

Source: markets.ft.com - Click to enlarge

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 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.

Swiss inflation is rising quite quickly now. See the last Swiss inflation data.

Intervening at elevated exchange rates – 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 is ready to intervene at higher levels, namely over EUR/CHF 1.07. Apparently, she has established some guidance, how many billions of francs she is ready to spend at which level:

At EUR/CHF around 1.650, she spent 4 to 5 bn. CHF per week. At 1.07 she only wants to throw 2.9 bn. at the market. For us, clearly too much: This is too risky and she will not maintain this pace over a longer term. Hence the EUR/CHF is prone to fall again.

Change in SNB Sight Deposits February 2017

Source: SNB - Click to enlarge

Two Innings of Swiss Franc Appreciation

- Click to enlarge

Speculative Positions

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 March 21:
As we expected, speculators reduced their net Euro shorts after the less dovish ECB.

But the net short of CHF nearly remains stable.
This resulted in a slight appreciation of EUR/CHF.

Speculative Positions

Choose Swiss Franc for CHF Commitment of Traders

source Oanda