Sight Deposits’ Drop Means SNB Has Narrowed Down FX Interventions

Sight Deposits’ Drop Means SNB Has Narrowed Down FX Interventions

28 June 2022

Data shows that the SNB’s sight deposits have dropped which means the bank is close to ending its campaign of purchases influence the Swiss Franc exchange rate.


Decline in Sight Deposits

As data shows last week the total level of sight deposits dropped down by 3.37 billion francs to 748.46 billion francs, which is the biggest decline since early 2012. In recent years sight deposits were increasing almost each week as the Swiss National Bank was purchasing lots of foreign currencies for newly created francs to stop Euro Franc Exchange rate  from falling. As a result sight deposits in commercial banks were expanding. Last year alone the number went up by 29 billion francs.

Sight deposits could have been reduced also by buying Swiss francs from commercial banks that hold sight deposits, but analyst do not believe that was the case this time. Another likely reason would be the reduction of number of liquidity-providing repurchase operations (REPOs) after the SNB lowered the threshold above which negative interest rates applies. Analyst can’t also rule out seasonal fluctuation or an increase in cash withdrawals from banks due to customers going on holidays, which also could lower sight deposits. The most likely reason though is stopping interventions on FX market.


Cheaper EUR CHF Exchange rate accepted

The huge decline in sight deposit accounts means the SNB is preparing to end its foreign currencies purchase campaign, launched years ago to keep at bay the exchange rate of CHF. According to analysts data indicates that interventions were stopped last week altogether and that the central bank had accepted CHF good exchange rate since it also raised interest rates on June 16. By raising the rates, the SNB acknowledged the CHF exchange rate would go up, as it was widely expected by experts.


Stronger CHF to Aid Inflation

Inflation in Switzerland is getting closer to 3% level. This means that preventing CHF from getting too strong with a use of FX interventions is not a good policy anymore, according to experts. In times of higher inflation, the SNB should not use interventions. Stronger exchange rate of CHF could bring down inflation. According to market analysts, at the level of EUR/CHF exchange rate at 1.01, the SNB will not actively try to strengthen CHF. Rather it would step up if franc was about to get weaker to 1.10 level.