SNB’s profit plummet due to FX losses
The Swiss National Bank reported a profit of CHF 1.2 billion for the first half of 2017, compared to CHF 7.9 billion for the first quarter. The sharp appreciation of the Swiss franc against most of its peers, mostly the US dollar, ate up the profits from shares and bonds investments. The Swissie rose 5.9% against the USD, 2.4% against the CAD and 2.1% against the JPY.
The SNB recorded a loss of CHF 3.6 billion on interest-bearing paper and instruments amid surging bond yields. On the other hand, equity securities and instruments contributed CHF 9.4 billion to the net result. Exchange rate-related losses reached CHF 11.8 billion. Negative interest rates charged by the SNB yielded a gain of CHF 970 billion.
Foreign currency investments rose to 728 billion as of June 30th from CHF 714 billion three months ago and 700bn six months ago, highlighting clearly that the SNB is committed to defend the Swiss franc.
As the SNB declared on Monday: “…financial result depends largely on developments in the gold, foreign exchange and capital markets. Strong fluctuations are therefore to be expected, and only provisional conclusions are possible as regards the annual result”. Therefore it is hard to draw any relevant forecast regarding the year-end results, especially since those results do not reflect the sharp depreciation of the Swissie against the euro of the last few days.
Last week, the CHF fell as much as much as 3.60% against the euro sending the EUR/CHF pair to 1.14. We see this sharp appreciation as a catch-up session for the Swissie. Despite a broad-based appreciation of the euro, the Swiss franc held ground, which led directly to a sustain appreciation of the CHF against the USD. However at some point EUR/CHF could stay completely immune to the euro appreciation, after all the end of the ECB’s ultra-loose monetary policy will impact the EU/CH interest rate differential. Therefore this is more a healthy adjustment, rather than the end of the CHF overvaluation. The EUR/CHF still has some legs but we doubt the pair will pass the 1.20 threshold. The 1.15 looks like to be a good equilibrium given the fact the EUR rally is losing steam.
Australia: RBA to wait & see
Tomorrow morning, the Reserve Bank of Australia’s cash rate is set to remain on hold at 1.5% despite the Aussie is on a bullish trend since mid-May. The Aussie can be traded at almost $0.80. It is worth noting that the Australian currency has gained more than 11% this year.
We believe that it is likely that the Aussie breaks above $0.80 given global fundamentals. In particular, the greenback keeps on getting weaker (Trump’s inability to deliver and Fed back towards patience). China’s growth (Australian main trade partner) is better and has known a third positive quarter in a row.
Earlier this month, the RBA mentioned that “a strengthening exchange rate” would definitely render difficult the central bank’s mission as Australia relies mostly on exports (iron ore). Australia’s GDP target of 2.25% for June 2019 looks nonetheless difficult to attain. Right now, the GDP lies at 1.7% y/y and the continue rise of the Australian dollar would likely force the RBA to slash their forecasts.
We do not believe the AUD strengthening is sustainable over the medium-term even though it implies higher commodity prices but exports and other sectors of the Australian economy could suffer. A pullback is now getting more likely.