Once again, given the new worries about the global economy, hope rests on the central banks. They are supposed to save the situation by cutting interest rates or buying securities. That sets the Swiss National Bank under additional pressure. If it does not follow suit with its own measures, investments in Swiss francs threaten to become more attractive, which would give the franc a further boost.
Last week the euro price in francs fell below 1.06, which is the lowest in five years. A lower euro price stands for an appreciation of the Swiss franc. The course is on a level with which smaller export companies in particular are hardly competitive anymore.
Intervened with CHF 3.5 billion
One of the reasons for the National Bank’s countermeasures is that despite the panic on the capital markets, there was no greater appreciation. From the change in the bank’s current deposits with the SNB, it can be estimated that the central bank intervened in the foreign exchange markets last week with CHF 3.5 billion.
In total, current deposits have increased by more than CHF 11 billion since mid-January. If the central bank buys euros on the market, it credits the corresponding sight deposits to the banks.
If she hadn’t had a special factor to help her, she would have had to spend even more money. Because the euro appreciated against the dollar. The reason for this is, however, not very reassuring: Many major international investors were indebted to the common currency in the run-up to the crisis and sold it against currencies such as the dollar, because higher interest rates can be expected there.
This type of business is called carry trades. That once weakened the euro. In view of the crisis last week, investors now wanted to settle their euro debts as quickly as possible, which is why they had to buy the euro back. And that has brought the common currency to an intermediate high.
Profit of CHF 48.9 billion
As UBS writes in an assessment, this reversal is now almost complete. The consequence: The euro threatens to weaken again – which in turn raises fears of a new round of appreciation of the franc. To prevent this, the National Bank would have to intervene even more than before. Or it cuts interest rates deeper into the negative range.
To make matters worse, given the current panic, other central banks are likely to lower their interest rates or open the money gates in some other way, for example by buying bonds. The US Federal Reserve (Fed) is already expecting up to three rate cuts this year. Fed chief Jerome Powell, for example, had confirmed on Friday that it would use all of the central bank’s funds to support the economy if necessary.
Representatives of the European Central Bank have also signaled that the ECB would intervene if necessary. Analysts expect the deposit rate for banks to go down two negative dips. This is currently 0.5 percent. The first such step could take place on Thursday in a week.
The appreciation of the Swiss franc and falling equity markets have consequences not only for the Swiss economy, but also for the National Bank’s expected profit. On Monday, it announced a profit of CHF 48.9 billion for 2019, confirming its January estimate. Of these, 32.9 billion alone resulted from price gains on their equity investments.
The SNB already announced in January that it would increase the distribution to the Confederation and the cantons above the previous maximum of CHF 2 billion for the last and the current year given the high profit of the previous year and high reserves from even earlier profits. It is now clear by how much: there is a maximum of another 2 billion, provided that the so-called distribution reserve (reserves from previous years plus remaining profit after the distributions) comprises at least 40 billion.
As there were 84 billion francs in the distribution reserve at the end of the year, the condition for the additional distribution for 2019 is fulfilled. However, if the stock exchange and foreign exchange markets continue in the same style as last week, the new maximum payout of CHF 4 billion for the current year is at risk. How the distributions will continue in the later years must first be renegotiated between the finance department and the SNB.
Created: 02/03/2020, 09:15 PM
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