Will SNB continue to allow CHF to go up?

Since the financial crisis, the SNB has seen its FX reserves rise from around CHF50bn to CHF922bn for an 18-fold increase.

With no chance of a move in policy rates – which are still the world’s lowest at -0.75% - it might seem that there is not much riding on Thursday’s Swiss National Bank (SNB) meeting. But that would be wrong. While other central banks like the Fed and ECB have decisions to make about the number of assets, they are buying and the speed at which they are doing so; the SNB has to make similar choices as well. In Switzerland’s case, as we know, the assets in question are not bonds, but currencies. 

Since the financial crisis, the SNB has seen its FX reserves rise from around CHF50bn to CHF922bn for an 18-fold increase. Reserves are over 120% of GDP which puts it only behind Japan (on 135%) when it comes to monetary policy support. For comparison, the ECB’s balance sheet is around 65% of GDP and the Fed’s 36%. So, even though the SNB has not had a sufficiently sized domestic bond market that it can tap to conduct quantitative easing, there is more than a sufficient amount of foreign currency available to buy – and the SNB has made the most of it. 

But clearly, QE conducted through the FX market is different from that conducted through the bond market. For a start, if the SNB is selling its currency, it must be buying other currencies and this creates spillover effects. The US Treasury is particularly concerned about this, having listed Switzerland as a currency manipulator a year ago. It has since scaled that back down to a country requiring ‘enhanced’ monitoring. With this in mind, it is notable that SNB intervention has been lacking in recent months at a time when the franc has appreciated significantly against the euro. Just whether US pressure has been a part of this is anybody’s guess. 

The SNB has been defending its corner and, in all likelihood, it may be other factors that are behind the SNB’s apparent lack of concern. One of these is rising inflation. For unlike prior years, when a strong franc threatened to bear down on – already low – Swiss inflation, the current surge in global inflation might mean that a stronger franc could be quite useful now. The SNB’s inflation aim is to hold price growth below 2%. There’s none of the allowances for overshooting inflation that we’ve seen from the likes of the ECB and Fed. But while there might be some sense in the SNB taking a step back from intervention, this does create the danger that the FX market takes an inch and runs a mile. And this is what makes Thursday’s SNB meeting so interesting. 

The key question is whether the SNB will repeat its claim that the franc is “highly valued” and hence, by implication probably too strong and so requiring intervention to limit  the rise. Mr. Steve Barrow, Head of Standard Bank G10 Strategy, said the answer to this would come from the most recent data from the SNB on the level of bank sight deposits held at the SNB. For after flatlining for a while, these rose quite sharply (CHF2.4bn) in the latest week to CHF722.8bn. When the SNB intervenes in the FX market, it buys currencies from the banks and credits them with newly created francs which show up in these sight deposit figures. Hence the relationship between sight deposits and SNB reserves is a pretty close one. 

If this rise in sight deposits does reflect increased intervention, it may well prove to be a sign that the SNB will continue to watch the currency closely and intervene when it deems necessary. “Our suspicion here is that the SNB will not be aiming to defend particular levels of EUR/CHF or trying to turn the euro back up. Instead, it will intervene only to limit  the pace of the slide in EUR/CHF if it becomes too fast. The fact that the franc rallied very recently, despite some easing of Omicron-related tensions in riskier assets, such as stocks, may have also persuaded the SNB to act. Franc rallies when risk aversion is soaring, it might be acceptable to the SNB, but a surging franc is not when risk aversion is going back down”, Mr. Steve Barrow said.