Increase in SNB sight deposits probably not a sign of foreign exchange purchases
Published: Monday, Jan 15th 2024, 12:20
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The Swiss franc is currently soaring. In the past, the SNB often combated the strength of the franc with foreign currency purchases. However, according to experts, the SNB is (still) refraining from doing so.
The Swiss franc is currently appreciating against the euro and other major currencies. At the end of December 2023, the euro traded for less than 93 centimes at times. The franc had thus reached another all-time high against the euro - excluding the sharp fluctuations in prices on January 15, 2015 following the discontinuation of the minimum euro exchange rate. Currently, 1 euro still costs around 93.4 centimes.
And the dollar is also continuing to lose value against the Swiss currency. The strong appreciation of the franc is causing the markets to focus heavily on the behavior of the Swiss National Bank (SNB). In 2023, the SNB frequently sold foreign currency to support the franc and combat imported inflation. In previous years, however, it had bought hundreds of billions in foreign currency to weaken the franc and support the Swiss export industry.
Sight deposits increase by CHF 7.4 billion
With the latest, stronger appreciation of the franc, there are now several more signs of such foreign currency purchases - at least if you take a look at the SNB's sight deposits. These have risen quite sharply in the past week. Specifically, they amounted to CHF 476.3 billion on January 12 after CHF 468.8 billion the week before, as the SNB announced on Monday. This is an increase of around CHF 7.4 billion.
There are various factors that influence the level of sight deposits. On the one hand, their development is an indication of the extent to which the SNB is using its open market operations to absorb liquidity (SNB Bills, repos). On the other hand, it is also an indication of whether the SNB is intervening in the foreign exchange market to influence the Swiss franc exchange rate.
The fact that the SNB dropped its previous focus on the opposite approach, namely currency sales, in its December assessment would fit in with the assumption of currency purchases, according to a commentary by Raiffeisen Economic Research.
Few signs of currency purchases
UBS economist Maxime Botteron, on the other hand, takes a critical view. He is not convinced that the SNB is buying foreign currency in the current environment. "When interest rates are positive, a central bank that wants to buy foreign currency in order to limit an appreciation of its currency must do so in a sterilized way, i.e. it must resume the liquidity created for the purchase of foreign currency," was his technical explanation when asked by the news agency AWP. And there are currently no signs of this happening.
The impact of such foreign exchange market interventions on the exchange rate is questioned by academic research anyway, according to Botteron. The level of sight deposits at the beginning of the year is partly influenced by special factors anyway, as the Raiffeisen economists add. For example, an increase in sight deposits of several billion francs is common because Swiss tax optimizers pay their previously withdrawn cash back into their bank accounts.
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