Weekly SNB Interventions and Speculative Positions: After French Elections

Headlines Week May 08, 2017

The centre-left 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 1.0960, 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 1.6 bn francs.

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

And so the EUR/CHF must go down again.

Euro/Swiss Franc FX Cross Rate, May 08

Source: Markets.ft.com - Click to enlarge

Eurozone Core Consumer Price Index has spiked up temporarily

The graph shows that the Core Consumer Price Index has spiked – for us temporarily.

Hence many investors also hoping that the ECB will start tapering.

But this is an illusion, given that oil prices are going down again and wage pressures are weak. So we see core inflation again under 1% at the end of the year or a bit above. The headline figure should dive under 1% next year.

Unemployment in the Southern countries and inflation pressures are still far too high for Draghi.

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

Source: Investing.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 – 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:
Serious investors – i.e. not FX speculators – did not follow the political events. The SNB had to intervene for 2.4 bn francs.

Change in SNB Sight Deposits April 2017

Source: SNB - Click to enlarge

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

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 May 02:

The net short CHF position has risen to 17K contracts (against USD).

Speculative Positions

Choose Swiss Franc for CHF Commitment of Traders

source Oanda