The dollar's strength and traditional end-of-year demand for cash in Switzerland kept investors guessing on Monday about the extent to which the Swiss National Bank may be intervening on currency markets to weaken the franc. The dollar's advance on expectations of a Fed rate hike this month seemed to be the main reason SNB currency reserves rose in November, while rising cash in circulation made it hard to gauge from weekly sight deposits data just what the SNB was up to.
"A strong US dollar means higher foreign exchange reserves valued back in Swiss francs," Bank J. Safra Sarasin Chief Economist Karsten Junius said. "It has nothing to do with the deposits, which - as we saw - remained stable." Switzerland's export-reliant economy has struggled with a surge in the franc's value since the SNB scrapped its cap of 1.20 francs per euro in mid-January, saying the policy, in place since September 2011, had become too expensive to maintain.
The SNB, which has stressed its willingness to intervene to weaken what it calls a "clearly overvalued" franc and makes its next monetary policy assessment on Thursday, declined to comment on why currency reserves rose by more than 11 billion Swiss francs in November. At nearly 563 billion francs, they reached a record high, the SNB confirmed. Credit Suisse economists in November estimated the central bank was buying foreign currency worth around 400-500 million Swiss francs ($900 million) per week. Sight deposits at the SNB eased last week. A rise in sight deposits can indicate central bank intervention in foreign exchange markets, but the normal year-end rise in cash in circulation can cloak this effect.
A Swiss foreign exchange trader, who asked not to be named, said it was clear the SNB had regularly been making small-volume interventions but might, for example, be stepping into the derivatives market to stop francs purchased showing up in weekly sight deposit data.
The euro has remained largely stable between 1.08 and 1.09 francs over the past two months, and has quickly stopped falling when it has it dipped toward the 1.076-1.078 mark. This could be due to interventions as well as to policy-savvy traders deeming it a good level at which to sell. Junius linked the stable exchange rate to the central bank's announcements that it would follow up on any euro-weakening ECB action to counteract a franc surge, creating enough credibility to restrain flight into the traditional safe haven.
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