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The SNB pledged to intervene and keep the Franc strong. That tees up sales of (US) stocks, foreign currencies or bonds.
Now, the Swiss National Bank is the world's best central bank and I won't hear any arguments against it. Let me explain...
They built up a warchest of foreign assets over the past decade or so by printing Swiss Francs, selling them for dollars and then buying stakes in some of the biggest companies in the US, including 71 million Apple shares!
Here's a snapshot of their top holdings at the end of Q1 via whalewisdom 👇
Some of those will need to be revalued as equity values have fallen. We'll come back to that shortly. The point is that the holdings are significant.
In the process of buying these equities, the central bank was able to push back against excessive CHF strength (because a deposit rate of -0.75% apparently wasn't enough to dissuade inflows to the safe haven).
But this month's policy meeting was a shock to many. The SNB hiked rates by 0.5% (now at -0.25%), and in contrast to many other central banks there weren't too many hints in the run up to the meeting.
The Swiss don't court the media every five minutes like other central *ankers we could mention...
So why did they hike?
ING: According to the press release, this rate hike is aimed at countering inflationary pressures, as inflation in Switzerland reached 2.9% in May, its highest level since the summer of 2008, which is higher than the SNB's objective of having inflation between 0 and 2%.
After years of fighting deflation, inflation is now too high and the SNB has decided to act quickly.
A familiar story this year. Inflation above target leads to a pretty significant policy change. Over the years, the SNB has tried to weaken the franc, and built up foreign currency reserves in excess of 800bn francs as they did so.
At the end of Q1, their balance sheet assets totalled over 1 trillion francs.
And now they've launched the opposite policy. If the currency weakens too much, they're prepared to sell foreign FX and assets to buy CHF and strengthen their domestic currency.
Sight deposits were always the metric to watch in the old regime. As the SNB intervened to weaken the Franc, sight deposits would increase. Now, they're heading the other way 👇
Yesterday's drop in sight deposits was the largest since early 2012. Some of this can be explained by technical factors due to the hike, so it doesn't necessarily mean the SNB is actively intervening (yet). However, it's definitely a sign of times changing...
Will the SNB sell stocks?
In about a month we'll find out if they already have been... The SNB's Q2 report will be posted on the 29th of July.
The value of the equity holdings will have fallen. That won't be a surprise. We've all seen the state of the stock market. The question is if they sold the dip or not, and the number of shares held (rather than the value of holdings) will be the tell there.
The ECB & EURCHF
FX intervention. Where does the SNB want the Franc to trade? ING have us covered again 👇
‘To ensure appropriate monetary conditions, the SNB is also willing to be active on the FX market as necessary’. We take this to mean that the SNB will now sell EUR/CHF to ensure that the trade-weighted CHF appreciates by roughly 4% per annum. Why do we say 4%?
Because the SNB told us in late April it wants to keep the real CHF stable and 4% nominal appreciation in the trade-weighted CHF is required to offset the low inflation in Switzerland relative to trading partners.
They have a target in mind too...
Expect now the SNB to use its substantial FX reserves to guide EUR/CHF lower over the next 12 months. We have a 12m target at 1.00. That target could be lower if the dollar were to be stronger than we forecast, driving USD/CHF higher and the trade-weighted CHF lower than our current projections. In that case, the SNB would need a lower EUR/CHF to offset the higher USD/CHF.
That target isn't too far below current levels in EURCHF, and USDCHF is currently lower too. The rate hike worked...
But if the ECB can finally figure out what they're doing with rate hikes and/or the fragmentation tool, odds should favour euro strength...
Aggressive SNB Response?
It depends. There's a bit of a cushion built in to the exchange rate already, and Europe's flash CPI data is out at the end of this week. If that comes in hot again, FX and European bond yields are unlikely to wait around for the ECB in July.
Because the SNB only meets quarterly, they can't respond to any ECB action via interest rates until the 22nd of September (short of an inter-meeting hike). Direct FX intervention can't be ruled out if the euro quickly strengthens.
There are three Swiss inflation reports between now and that next SNB meeting.
It's a brand new era, and the SNB response to these conditions will play a key part in how the swiss franc trades, while potentially becoming a headwind for large US stocks if they do need to get seriously aggressive.
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