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Analysis-Swiss central bank stands by as equities boom drives the franc By Reuters


© Reuters. FILEPHOTO: This is the Swiss National Bank logo, which can be seen on their building in Bern (Switzerland), June 17, 2021. REUTERS/Arnd Wiegmann/File Photo


By John Revill and Elizabeth Howcroft

ZURICH (Reuters) – Stock market flows and overseas investment returns are emerging as major drivers for Switzerland’s currency in a shift that may already have triggered changes in how the country’s central bank responds to franc strength.

The Swiss National Bank (SNB), has always intervened in order to stop excessive franc appreciation. This could be caused by panicky investors purchasing francs during markets that are weak or by speculators trying to test the bank’s resolve.

Last month’s franc reached an all-time high of 1.069494 against the Euro, a sign that the SNB was active. However, banks did not see a rise in their so-called sight deposits.

Analysts say the recent franc spike is due to foreign investment flowing into Swiss stocks and not speculative bets.

The SNB’s comments on the Franc will focus attention at Thursday’s monetary policy meeting. It is unlikely to alter its current -0.75% rate, which is the lowest in the world.

SNB increased its inflation projections at its June monetary assessment but maintained its extremely loose policy to control the franc. SNB said the franc was “highly valued”, and that it would continue to be able to intervene on forex markets if necessary.

Analysts believe that franc appreciation is shifting to equity investment. Particularly into Swiss heavyweights Nestle or Roche has helped boost inflows. These defensive shares are highly sought-after in times of uncertainty, according to analysts.

Although the stock exchange of Switzerland does not publish flows data, Swiss balance numbers from 2021 for the quarter show portfolio investment inflows at $12.2 billion. That’s just below the $13 billion set by early 2015 according to Refinitiv data.

Karsten Junius (an economist at J.Safra Sarasin) noted that global equities outperformed Swiss blue chips by six percentage points in the six-months to August.

Junius claimed that Swiss multinationals were gaining from the change in business cycles as the world economy suffered from its late-2021 recovery and investors shifted to defensive shares.

The SNB may be asking: “Do we want to combat this?” Is there anything they can do to slow down the global business cycle? Junius said.

Junius added, “Speculative flow into the Franc is something that you can fight but this is fundamental change in economic cycle.” “The SNB has to be open to this change and decided to remain at the margins.”

SNB refused to comment.

SNB intervention can be seen in the so-called sight deposits, which is money that banks store overnight with SNB. When the SNB purchases more currency markets to reduce the franc, these tend to go up.

Recent declines in sight deposits are not surprising.

The latest week ended Sept. 17, with total sight deposits at 714.65 Billion Swiss Francs (767.70 Billion). This is a slight decrease from a week ago.

According to Refinitiv data, bank sight deposits increased by 3.75 Billion Francs last August. This compares with a rise of 10.99 billion francs last August.

Graphic: SNB sight deposits:

Graphic: Equity:


Another powerful driver of franc strength may come from the SNB’s own holdings.

SNB has a large amount of foreign reserves that it invests in international equities, credit, and other investments.

Based on data from the SNB, these holdings produced 43.5 billion Francs of profits in 2021’s first half. This compares to almost 50 billion and 21 billion respectively in 2019.

SNB top holdings are Apple (NASDAQ;), Microsoft, Alphabet (NASDAQ :), and Amazon (NASDAQ :). These filings were made to the U.S Securities and Exchange Commission. Based on data from Refinitiv, the combined market capital of these tech companies increased by 34% in the last year.

Graphic: A growing share:

Hedge fund Eurizon SLJ Capital said that as booming stocks and hefty dividends boost the value of the SNB balance sheet, it becomes harder for the franc to weaken.

The franc therefore is no longer a pure “fiat” currency that derives its value from the central bank’s credibility, but one backed by actual dividend-yielding foreign assets, Stephen Jen and Joana Freire, analysts at Eurizon SLJ, wrote.

The analysts stated, “Risks to franc might be skewed towards the strong,” i.e. it could strengthen once again in risk off but will not lose that much in the risk-on.”


The Swiss economy, forecast to grow at an above-trend 3.2% this year and 3.4% in 2022, seems to be coping for now with the robust franc.

Junius thinks the SNB will be content with euro/franc at 1.7070 or higher, which is a level that won’t threaten exports.

The franc is now 5% more overvalued than the 30-year-old averages. This inflation adjusted. According to J.Safra Sarasin, the franc was 13.3% more overvalued in January 2015 before the SNB removed the “floor” against the euro.

Gero Jung of Bank Mirabaud, Geneva said that the SNB might prefer a weaker currency, but has maintained low intervention levels.

According to him, “I do not believe it is a concerted effort in order to substantially weaken” the Franc.

($1 = 0.9309 Swiss francs)