How big was the Swiss National Bank’s forex intervention in May?
This big. (Click to enlarge and get the full Hildebrand experience):
That’s from Sean Corrigan at Diapason Commodities, who notes that according to provisional data released by the Federal Statistics Office on Tuesday, the SNB upped its holdings of forex reserves by a whopping CHF78.8bn (USD$68bn) in May, or CHF138.5bn since January. That’s CHF3.5m for every minute of every eight-hour trading day in the past four months. Or, as Corrigan puts it:
In a broader context, this amounts to around 133% of nominal private GDP consumption or – at SFr30,500 for each of the Confederation’s 4.53 million workers – equal to Sfr46.60 per hour – around 136% of their median labour income for the period – equivalent, therefore, to hiring an extra 6.2 million souls (not easy to achieve in a nation of only some 7.5 million).
So far, by spending this almost unimaginable sum, the SNB managed to limit the Franc’s appreciation to some 3.5% vis-vis the euro, versus the 12.5% gain made by the US dollar – i.e., it spared the currency an extra move of ~9%.
So, even assuming that ALL Swiss exports have a perfectly elastic demand curve and that there are NO gains to be had from the commensurately cheaper imports foregone (and, hence, from a lower cost base for a small, specialised, resource-poor country), we might reckon that, with Swiss goods exports to the Eurozone running at around Sfr35 billion for the period (together with perhaps another Sfr12 billion in service exports) – roughly 55% of the nation’s total – he might at best have staved off Sfr4.2 billion in lost export revenues (9% of SFr47 billion) – for each single franc of which lavish act of sectional corporate welfare no less than SFr32.80 have been printed up and passed out, with all the risks this entails for future monetary stability.
Some pricey FX meddling.
Unsurpringly, some analysts are starting to feel uncomfortable with these numbers. The big question for them is how long can the SNB keep this up — and with what consequences?
RBS, for instance, noted on Tuesday that the Bank might have some trouble sterilising its enlarged operations — the implication being that domestic money supply could escape the SNB’s control.
IFR Markets’ Divyang Shah thinks the SNB could keep going — but with difficulty:
. . . This is an extraordinary rate of reserve accumulation and highlights the degree to which the SNB has been effectively meeting safe haven demand for the CHF. Whether its concerns over the Eurozone sovereign debt crisis or the EUR’s store of value what is clear from the intervention figures is that the safe haven demand for the CHF is not looking like it will diminish anytime soon. The question for the SNB then is whether they want to continue to effectively have an FX target or refocus policy toward money supply and longer term inflation risks.
With the Eurozone sovereign debt situation still unresolved the fear is that fallout from what is effectively a fiscal transfer system will eventually lead to much bigger cracks in the system. What is interesting is that the breakup debate has permeated itself into official speak with RBA’s Broadbent suggesting that eventually strong euro countries might break out of the euro. The risk of being left with a euro that is less than a hard currency is leading to a flight to CHF as well as the USD and even GBP. The SNB will likely continue to smooth downside on EUR/CHF but clearly given the flows involved they are fighting an uphill battle . . .
Goldman Sachs’ Dirk Schumacher is a bit more ambiguous:
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 . . . 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 . . . 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.
And JP Morgan (via Zero Hedge) just laughs in the face of SNB intervention:
* We would need to check my records a little more careful but we suspect the SNB has set a new world record with its FX intervention in May. Data released by the Swiss Statistics Office and confirmed to us by the SNB puts intervention at CHF 78.8bn in May (yes, that is the change of reserves, not their level). To put this into perspective, this is nearly three times the previous largest monthly intervention and amounts to 15% of GDP in just one month. Current reserves are now CHF 232bn or 43% of GDP.
* We knew the SNB intervened in heroic quantities to defend the 1.40 level but this figure is way beyond even the most extreme estimates. It is in fact just plain silly, and confirms an FX policy that: 1) has run out of control; and 2) is even more unsustainable than thought. And even should the SNB be reckless enough to want to repeat intervention on this scale, we can be pretty certain that it will only do so on a liquidity-sterilised basis. There is simply no way the SNB is going to conduct unsterilised intervention on this magnitude and very quickly lose complete control of domestic money supply. The fact that EUR/CHF has declined by 10% even though the SNB has sold nearly CHF 190bn, or 35% of GDP, since the spring of last year, is a clear a demonstration that sterilised intervention, for this is what the SNB has done, simply does not work. It is a con-trick, one which the market is learning to look through . . .
Over to you, markets.
Related links:
Chart du jour – EUR/CHF – FT Alphaville
Bonfire of the currency correlations – FT Alphaville
Swiss franc intervention cost a billion a day in April - FT Alphaville