We have previously argued that the Swiss National Bank has become slightly more tolerant of modest currency strength, given that the sheer scale of previous FX intervention has dented the central bank’s appetite for further balance sheet expansion. The top-left chart, showing bank sight deposits (used as a proxy for central bank intervention), suggests that the SNB has been on the sidelines during the recent bout of CHF strength.

That said, there is still a pressure point beyond which the SNB is likely to relent and start materially buying foreign currency again. With inflation still relatively weak 18-months after escaping a multi-year period of falling prices (top-right chart), sustained CHF appreciation risks a relapse back into deflation. Looking at the experience of 2016 it is clear that FX intervention occurred consistently throughout the year with EURCHF trading largely within a 1.06-1.12 band. Sight deposits levelled off after July 2017 at which point EURCHF had pushed into a new trading range above 1.10. As such, we would flag a push below 1.10 as a potential trigger point for fresh SNB intervention. Speculators remain very net short the CHF. If their patience wears thin and they throw the towel in, the resulting short squeeze is one path that could get EURCHF to that level.

 

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception