ZURICH, Sept. 20 (Reuters) – Stock market flows and returns on overseas investments appear to be the main drivers for the Swiss currency in a shift that may have already sparked changes in the way the country’s central bank reacts to the strength of the franc.
Historically, the Swiss National Bank (SNB) has intervened to prevent an excessive appreciation of the franc, caused either by speculators testing the central bank’s resolve or by panicked investors buying francs when markets deteriorate.
But last month, as the franc hit a nine-month high against the euro at 1.0694, there was no significant increase in banks’ “sight deposits”, a usual sign of the SNB activity.
Analysts said the latest surge in the franc reflects the flow of foreign investment in Swiss stocks rather than speculative betting, alongside a boom in foreign stocks held by the SNB itself.
What the SNB has to say about the franc will be the focus of its monetary policy meeting on Thursday, where it is not expected to change its interest rate by -0.75%, the lowest in the world.
In its assessment of monetary policy in June, the SNB raised its inflation forecasts but maintained its ultra-flexible policy to contain the franc. The SNB called the franc “highly valued” and said it remained ready to intervene in foreign exchange markets if necessary.
Analysts said a shift in the drivers of the franc’s appreciation towards investment in equities, particularly in Swiss heavyweights such as Nestlé and Roche, boosted inflows. Analysts have noted strong demand for these defensive stocks in times of uncertainty.
The Swiss stock exchange does not publish data on flows, but Swiss balance of payments figures for the first quarter of 2021 show portfolio investment inflows of $ 12.2 billion, just below the record 13. billion dollars recorded in early 2015, according to data from Refinitiv.
Karsten Junius, economist at J. Safra Sarasin, noted that between six months and the end of August, Swiss blue chips outperformed global equities by 6 percentage points.
Junius said Swiss multinationals profited from the shift in the business cycle as the global economy cooled from its rebound in early 2021 and investors turned to defensive stocks.
“The SNB is probably asking, do we want to fight this? Can they do anything about the moderation of the global economic cycle? Junius said.
“Speculative flows into the franc is something you can fight, but it’s a fundamental shift in the business cycle,” he added. “The SNB must accept this development and has decided to stay on the sidelines.”
The SNB declined to comment.
Evidence of the SNB’s intervention appears in the so-called “sight deposits”, that is, the money that commercial banks place overnight with the SNB. These tend to increase when the central bank increases its purchases in the currency market to amortize the franc.
But demand deposits have declined recently.
For example, total overnight deposits declined slightly in the last week ending September 17 to 714.65 billion Swiss francs ($ 767.70 billion) from the previous week.
Demand deposits at banks rose by CHF 3.75 billion in August, compared to an increase of CHF 10.99 billion in August last year, according to data from Refinitiv.
Another powerful driver of the franc’s strength could come from the SNB’s own holdings.
The SNB invests a large part of its foreign exchange reserves in foreign stocks and loans.
These holdings generated 43.5 billion francs in profits in the first half of 2021, against nearly 50 billion in 2019 and 21 billion last year, according to data from the SNB.
The main holdings of the SNB include Apple, Microsoft, Amazon, Facebook and Alphabet, according to documents filed with the United States Securities and Exchange Commission. The combined market capitalization of these tech companies has grown 34% in the past year, based on data from Refinitiv.
Hedge fund Eurizon SLJ Capital said that as booming stocks and high dividends increase the value of the SNB’s balance sheet, it becomes more difficult for the franc to weaken.
The franc is therefore no longer a pure “fiat” currency which derives its value from the credibility of the central bank, but a currency backed by real foreign assets generating dividends, wrote Stephen Jen and Joana Freire, Eurizon analysts. SLJ.
“The risks for the franc can be tilted towards the strong side, that is, it will strengthen again in risk but not weaken as much in risk,” they said.
The Swiss economy, which is expected to grow above trend of 3.2% this year and 3.4% in 2022, appears to be facing the strength of the franc for now.
Junius believes the SNB would be happy with a euro / franc at 1.070 or above, levels that will not threaten exports.
On an inflation-adjusted basis, the franc is overvalued by 5% compared to the 30-year averages. In January 2015, before the SNB removed the “floor” it had set against the euro, it was overvalued by 13%, according to estimates by J. Safra Sarasin.
Gero Jung, an economist at Banque Mirabaud in Geneva, said the SNB would likely prefer a weaker franc, but kept its interventions low.
“I don’t think this is a concerted effort to significantly weaken the franc,” he said. ($ 1 = 0.9309 Swiss francs)
Reporting by John Revill and Elizabeth Howcroft; additional reporting by Tommy Wilkes and Saikat Chatterjee; edited by Sujata Rao and Jane Merriman