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

Summary:
Headlines Week March 27, 2017 We were arguing in the last weeks, that the EUR/CHF is trending towards parity. There are three reasons: Continuing SNB interventions Strengthening Swiss local demand, as also visible in the GDP release. 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(see more posts on EUR/CHF, ) 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.

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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

(see more posts on EUR/CHF, )
Weekly Sight Deposits and Speculative Positions: SNB interventions are rising again

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

(see more posts on SNB sight deposits, )
Weekly Sight Deposits and Speculative Positions: SNB interventions are rising again

Source: SNB - Click to enlarge

Two Innings of Swiss Franc Appreciation

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

- Click to enlarge

Speculative Positions

Speculators were net short CHF in January 2015, shortly before the end of the peg, with 26.4K contracts. Then again in December 2015, when they expected a Fed rate hike, with 25.5K contracts.

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

Date of data (+ link to source) avg. EUR/CHF during period avg. EUR/USD during period Events Net Speculative CFTC Position CHF against USD Delta sight deposits if >0 then SNB intervention Total Sight Deposits Sight Deposits @SNB from Swiss banks “Other Sight Deposits” @SNB (other than Swiss banks)
24 March 1.0718 1.0786 Fed meeting -11979X125K +2.9 bn. per week 560.1 bn. 476.3 bn. 83.8 bn.
17 March 1.0726 1.0699 SNB meeting -8997X125K +1.8 bn. per week 557.2 bn. 470.9 bn. 86.3 bn.
10 March 1.0722 1.0587 ECB meeting -10016X125K +2.1 bn. per week 555.4 bn. 467.4 bn. 88 bn.
03 March 1.0662 1.0569 Swiss Q4 GDP weaker than expected -11814X125K +5.1 bn. per week 553.3 bn. 471.4 bn. 81.9 bn.
24 February 1.0648 1.0570 New record in Swiss trade surplus -8936X126K +4.7 bn. per week 548.2 bn. 470.2 bn. 78.0 bn.

For the full background of sight deposits and speculative positions see

SNB Sight Deposits and CHF Speculative Positions


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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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