While the SNB clearly favours using FX interventions to weaken the franc at present, persistent concerns about the size of its balance sheet would make it reticent to step in on an ever-greater scale. With no easy choices, we think that, if push came to shove, the Bank could tolerate a stronger franc.
- While the SNB clearly favours using FX interventions to weaken the franc at present, persistent concerns about the size of its balance sheet would make it reticent to step in on an ever-greater scale. With no easy choices, we think that, if push came to shove, the Bank could tolerate a stronger franc.
- The weekly data on sight deposits at the SNB, published by the Bank every Monday morning, have become a must-see series for Swiss-watchers in recent years. As we have noted before, changes in the series offer a reasonable proxy for FX interventions to weaken the franc.
- This morning’s data suggest that the Bank nearly doubled the amount of interventions last week compared to the week before, and intervened on a scale not seen since early 2015, around the time of the infamous Frankenshock. (See Chart 1.) Given the SNB’s past form in taking investors by surprise, the question is whether the stage is set for another about-turn by Swiss policymakers?
- Not necessarily. After all, the SNB signalled at its last policy meeting, in mid-March, that currency interventions will be the first port of call to counter upward pressure on the franc from virus-related safe-haven flows, and it has tolerated intervening for prolonged periods at times over the past five years. (Again, see Chart 1.) Moreover, when measured as a percentage increase in the existing stock of sight deposits, it’s worth noting that the interventions made last week were still much smaller than at the peak five years ago (1.9% last week versus a peak of 6.5% in January 2015).
- That said, while the SNB clearly thinks that FX interventions are its best tool at present, it is not clear how it would react if it felt the need to to step in on an ever-larger scale, or if virus-related disruption lasts for longer than it expects. Only the three members of the Governing Board knows exactly what they are willing to tolerate, but experience shows that they worry more about the speed of balance sheet expansion than the size of the balance sheet itself. We think that alarm bells would ring if the Bank had to make sustained interventions in the region of CHF 15-20 billion per week (ie, weekly increases in sight deposits of about 2.5-3%). It potentially has four options up its sleeve if it decided to ditch interventions.
- The first would be to introduce another currency peg but, in our view, this would not be an upgrade on its current policy. Indeed, by formalising its commitment to intervene, it would run the risk of losing control of its balance sheet again, which was the straw that broke the camel’s back in 2015. (See here.)
Chart 1: SNB Sight Deposits & Swiss Francs per Euro
- A further cut in the policy rate, from the current -0.75% to, say, -1.00%, could help to reduce the attractiveness of holding Swiss francs. However, this might not be a silver bullet given that some investors might still judge -1.00% a fair price for the comparative stability of holding francs in these uncertain times. And, in any case, the SNB seems loathe to heap even more pressure on the banking sector.
- A third option could be to reimpose some restrictions on foreign capital inflows, as the Bank did in the 1970s when it introduced penalties on any increases in non-resident deposits. Thomas Jordan said in 2012 that policymakers would consider reintroducing capital controls in a “worst case” scenario so never say never, but it would probably not want to go nuclear so soon.
- The only other option for the SNB would be to let the franc appreciate. While this would exacerbate concerns about deflation, the fact that the Bank stopped short of calling the currency “significantly overvalued” at its last policy meeting, favouring instead “even more highly valued”, suggests that it sees some wriggle room. (See Chart 2.) That said, given that the franc has risen by about 3.5% against the greenback since the policy meeting on 19th March, alongside gains by other safe havens (see Chart 3), it may already have used up this room for manoeuvre.
- On balance, so long as the SNB can get away with making comparatively small interventions to weaken the franc, it will. However, if it became clear that the only way it could resist upward pressure on the currency was by expand its balance sheet quickly, say by CHF 15-20 billion, this could be a bridge too far. In that situation, of all its options, letting the franc appreciate may be the best of a bad bunch.
Chart 2: Exchange Rate & SNB Language
Chart 3: Safe Havens (3rd February = 100)
Sources: Refinitiv, SNB
Sources: Refinitiv, Capital Economics
David Oxley, Senior Europe Economist, email@example.com