The SNB has released provisional data indicating FX investments on its balance sheet have exploded by 50% in just the last month, to CHF 232 billion from CHF 153 billion, is indicative of a rate of FX intervention in the market more than double the prior record set in April! All this has occurred as the SNB has tried to keep the EURCHF above 1.40. It has now officially failed at this attempt, as the Euro just hit a fresh all time low against the Franc of 1.3763. Furthermore, recent market talk indicates that the SNB will no longer directly intervene in the pair, thus confirming that there is likely much more room for CHF appreciation in the near term, and more pain for Eastern European countries, where the bulk of real estate bubble borrowing has been denominated in CHFs. In the meantime the side effects of consistent SNB intervention are hard to miss: the Swiss balance sheet has increased to 3 times its pre-2009 average. Unlike the US, it is not loaded up with toxic GSE filth but merely with currencies increasingly backed by such filth, such as euros.
Some more commentary on this recent balance sheet escalation from Goldman Sachs:
Another record on FX interventions
BOTTOM LINE: Provisional data released today show that the level of FX investments on the SNB's balance sheet at the end of May rose from CHF 153bn to CHF 232bn. This is a 51%mom increase and, needless to say, represents a volume of FX intervention around 2½ times the record just set by the April release. These data are only provisional, and subject to revision, but whatever the eventual level, it is clear that - with the CHF continuing to appreciate strongly amidst the European financial market turbulence - the SNB will have intervened at truly unprecedented levels in May. It is equally clear that the size of the SNB's balance sheet has become precarious: assuming today's preliminary release is not modified, the value of total assets on the SNB's balance sheet has swollen to almost 3 times its pre-2009 average. We have written before on both (i) the financial risk run by the SNB in pursuing this strategy of intervention, and (ii) how unsustainable the current rate of intervention is.
1. These data for May are only provisional. They are released, for a subset of line items on the SNB's balance sheet, on the website of the Federal Statistical Office. The confirmed level of foreign-currency investments on the SNB's balance sheet in May will be published on 21 June in the usual Monthly Statistical Bulletin.
2. Today's three data releases epitomise the SNB's current dilemma - the real economy continues to show signs of strength, while the downward move in May core inflation reinforces the SNB's concerns regarding the risk of an outright deflation. Yet the stratospheric level of outstanding FX reserves on the SNB's balance sheet underline the fact that the central bank's room for manoeuvre on the FX-side of policy accommodation gets smaller by the month.
3. That said, as long as the funding conditions for peripheral countries of the Euro-zone remain severely strained in financial markets, the SNB is unlikely to change either its tone or its stance at the next quarterly monetary policy meeting on 17 June. We continue to expect the first hike to take place in December.