SNB Sight Deposits: Inflation Fear Decreasing, SNB Selling Euros

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George Dorgan
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Update September 20 2021: SNB Selling Dollars and Euros

Sight Deposits have fallen: The change is -0.2 bn. compared to last week, this means the SNB is selling euros and dollars.

We had finally arrived in the inflation scenario I was speaking about before.

Inflation is the period, when both the Swiss franc and gold must go up.

BUT :

U.S. CPI is at 5%, at the highest value since the year 1990 (excluding one outlayer in Summer 2008).

But European inflation has gone down to 1.9%., In particular prices of European services, that are mostly correlated with longer-term inflation, went down to +0.7%Hence Stock markets have recovered – after the initial fear.

Speculative Positioning: Speculators are long CHF against USD, Moreover they are long EUR position against USD, already over one year.

The following shows the recent developments.

• Sight Deposits, i.e. SNB interventions
• Speculative positions CHF: Since April 2020, speculators are long CHF against USD; the number is positive.
• FX rates (inside the graph)

Sight Deposits versus EUR/CHF The following graph shows the last week’s change in sight deposits compared with the EUR/CHF exchange rate since the height of the Corona crisis. High sight deposits is the equivalent of big SNB interventions. The SNB typically intervenes, when the EUR is weak against CHF. Clicking inside the graph, the reader can see the FX prices. We see the lowest price for a euro at 1.0521 and 1.0568 in March 2020 and April 2020, actually when the sight deposits were highest.
Speculative Positions The second driver of a strong CHF is the speculative position (against USD). A higher long CHF speculative position typically means that USD/CHF gets weaker.
Sight Deposits between 2014 and April 2020 The graph shows the development of sight deposits between 2014 and 2018: January 2015: High SNB intervention during before the end of the peg Sudden fall after that, together with the EUR/CHF rate 2015-2016: Smaller interventions in @ EUR/CHF 1.10 June 2016: intervention during Brexit @EUR/CHF 1.08 Nov 2016: intervention after Trump election @EUR/CHF 1.08 Early 2017: intervention during with ECB bond buying @ EUR/CHF 1.05-1.10 July 2017: End of interventions with Macron election and the rise of EUR/CHF over 1.10 up to 1.18 2018: Smaller interventions, e.g. during the Turkish Lira crisis Mid 2019: Interventions, when EUR/CHF breaks 1.10 downwards again 2020, before Corona: Smaller interventions, EUR/CHF towards 1.07 2020, Corona Crisis: Heavy interventions	SNB Sight Deposits vs. EUR/CHF - Click to enlarge
Frequently Asked Questions What are sight deposits? They 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".
A: Why is SNB buying FX positions? The SNB buys FX positions, because she considers CHF to be too strong. Hence it would harm in particular the Swiss exports and the jobs in the export industry.	A: Why is SNB selling FX positions? To sell FX position is not a deliberate decision, but purely based on the SNB funding situation, as visible in the balance sheet above. In short: The SNB is forced to sell When banks remove funding on the liabilities side of the balance sheet - most the so-called "sight deposits" - then the SNB is forced to sell FX positions on the assets side.
	B: Why are banks removing funds from the SNB? Typically banks move the funds to the central bank, when they do not have nothing better to do with, e.g. (1) lending it to companies or private investors at a (positive) interest rate with sufficiently low risk - or (2) invest it in a currency with higher interest rates. Ad (2) Due to regulatory restrictions, banks or insurances cannot easily invest their assets into foreign currency - other from their reporting currency. Hence (2) is mostly driven by hedge funds or speculators, which are not contained in the sight deposits. When banks do not find the demand for loans, then they must deposit the funds at the central bank. There is no other way - apart from keeping the assets as cash.
C: Sight deposits are assets for the banks, but liabilities for the central bank. What we explained for the central bank, is also valid for the banks: When foreigners decide to deposits funds on a Swiss bank, then the right side of the bank's balance sheet rises and so will the left side, the assets. Again when the bank has nothing better to do with these assets, it must (sight) deposit at the central bank, at the SNB.	D: When does this vicious cycle end? The "vicious" circle for the central bank,  is that it is buying more and more foreign FX. This cycle is only broken when foreigners decide to stop buying assets (e.g. cash, stocks, bonds, houses) denominated in Swiss francs. This happens typically when they think that the assets in Swiss Franc are losing too much value. CHF cash might lose value due to FX speculators (see below) But rising CHF stocks or rising Swiss house prices might counter the falling currency, so that it is still worth buying Swiss assets. Terms of balance of payments Finally we will have to look at the balance of payments. The Swiss current account surplus must be smaller than outflows in the financial account.

Detailed Explanations

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.
FX 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).

 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 - and

how it sold FX positions since Summer 2017.

The terms are explained in the sections above.

Weekly SNB Intervention Watch: Sight Deposits

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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