Swiss National Bank sight deposits drop as FX intervention winds down

By John Revill

ZURICH (Reuters) – Cash held overnight by the Swiss National Bank fell last week by its largest amount in more than a decade, according to data published on Monday, signalling the end of the central bank’s forex purchase campaign to weaken the Swiss franc.

In recent years, the level of sight deposits had increased on an almost weekly basis as the SNB bought foreign currencies from commercial banks with newly created francs.

As a result, commercial banks’ sight deposit accounts expanded, increasing by 29 billion francs this year alone as the SNB fought to stem the rise of the safe-haven franc.

But data showed the total level of sight deposits fell by 3.37 billion francs to 748.46 billion francs last week, the biggest weekly drop since early 2012.

The SNB declined to comment on reasons for the decline.

Analysts said the decline indicated the SNB had halted interventions and accepted the franc’s recent strengthening since the central bank hiked its interest rate on June 16.

“After increasing interest rates two weeks ago, the increases of the franc’s value were be expected,” said Maxime Botteron, an economist at Credit Suisse.

“As inflation is getting close to 3% in Switzerland preventing the Swiss franc from appreciating through FX purchases would not be an appropriate policy. Foreign currency purchases should therefore be a thing of the past.”

Analysts do not believe the SNB has been buying francs from sight deposit-holding commercial banks using foreign currencies it holds, one way sight deposits could be reduced.

An even stronger franc could help dampen Swiss inflation, while the SNB has also said it would consider selling foreign currencies if the franc were to weaken.

“We don’t think that at EURCHF 1.01 the SNB is going to actively strengthen the Swiss franc. This would be the case at 1.10,” said Alessandro Bee, an economist at UBS.

Sight deposits could also have dipped as the SNB likely reduced the number of liquidity-providing repurchase operations (REPOs) after it lowered the threshold above which its negative interest rate applies.

This means more banks’ reserves are covered by the -0.25% interest rate, giving them less of an incentive to borrow money from the SNB via REPOs.

The amount of money held via sight deposits will have declined as banks borrow less using REPO operations and pay back the SNB for REPOs that are already outstanding, said Credit Suisse’s Botteron.

Another factor could be an increase in cash withdrawals from banks by holidaying customers, which are deducted from their sight deposits.

“We also cannot rule out seasonal fluctuations,” said Karsten Junius, an economist at J.Safra Sarasin. “It could be that commercial banks reduced their deposits as households need more cash for the travel season.”

(Reporting by John Revill; Editing by Bernadette Baum)