Speculation is now a fact: the Swiss National Bank is actively intervening on the market since mid-July to stabilize the currency. Aside of the central bank’s sight deposits, considered as an early indicator of SNB intervention and which rose in the past three weeks at a strong pace, the SNB holdings of currency reserves swelled at a new historical level of CHF 767.9 billion (110% of GDP in 2018) as mounting risk-off sentiment pushed safe haven Swissie in demand. Since the franc currently stays safe from overvaluation levels, FX interventions remain a viable policy tool. However, a sharp rise in financial market concerns would make the measure almost null and void, without considering the risk exposure of SNB’s balance sheet as the share of government bond purchases in foreign exchange reserves is likely to have increased from 70% in June 2019.
The SNB interventions intensified following the end of July ECB meeting that ended on a dovish note and the prospect of a rate cut along with additional stimulus policies for September 2019. In order to limit competition with the ECB for purchases of Eurozone public sector bonds, which are expected to resume in September, when the ECB's quantitative easing program is expected to resume, the SNB has already taken the initiative in the same way as in 2012. At that time, the SNB absorbed as much as EUR 80 billion of government debt in the first seven months of the year, totaling 48% of Eurozone public sector financing demand during the period. Accordingly, as the CHF appreciation is not directly induced by Switzerland economic fundamentals, the room of maneuver remains very limited for the SNB when it comes to currency stability. Despite the current trend towards appreciation, the Swiss export industry should remain comfortable in the current ranges.
USD/CHF is trading at 0.9790, approaching 0.9820 short-term.
