SNB balance sheet inflates

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.

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USD/CHF is trading at 0.9790, approaching 0.9820 short-term.

NZD in the doldrums amid surprise 50bps cut from RBNZ

The New Zealand dollar tumbled more than 1.8% during the Asian session amid a bigger-than-expected rate cut from the Reserve Bank of New Zealand. The Kiwi fell as much as 180pips to 0.6378 against the greenback after the RBNZ trimmed the Official Cash Rate by 50bps to record low 1%, while market participants were expecting a cut of only 25bps. The currency pair broke the $0.6425 support (low from October 8, 2018) and is currently testing the key $0.64 support area implied by the 61.8% Fibonacci level (based on March 2009 – July 2011 rally). On the downside, the next supports lies at $0.6348 (low from January 20, 2016) and then $0.6237 (low from September 23, 2015). A break of those levels would open the road towards 0.6130 (low from August 2015).

The RBNZ has choose its side and it is going to be the dovish one. Adrian Orr not only over delivered by cutting 50bps but also open the door to negative interest, or even non-conventional policy, amid worsening economic outlook and subdued inflation pressures. The Australian dollar was also affected by the decision of its neighbour’s central bank as investors anticipate the RBA will follow the footsteps the RBNZ and cut further interest rates. Australian and New Zealand are some of the few countries that are not using negative rates. However, times are changing and the countries are starting to pay a price for their dependency to the Chinese economy. Indeed, 39% of Australia’s exports goes to China, this figure reaches 28% for New Zealand). We believe that both the Kiwi and the Aussie will continue to move lower.

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