The following post is based on research from Arnaud Masset, Market Analyst at Swissquote Group Holding SA (SWX:SQN). For more of Arnaud’s research see Swissquote Research.
Arnaud Masset, Swissquote
The Swiss National Bank reported a profit of CHF 1.2 billion for the first half of 2017, compared to CHF 7.9 billion for the first quarter. The sharp appreciation of the Swiss franc against most of its peers, mostly the US dollar, ate up the profits from shares and bonds investments. The Swissie rose 5.9% against the USD, 2.4% against the CAD and 2.1% against the JPY.
The SNB recorded a loss of CHF 3.6 billion on interest-bearing paper and instruments amid surging bond yields. On the other hand, equity securities and instruments contributed CHF 9.4 billion to the net result. Exchange rate-related losses reached CHF 11.8 billion. Negative interest rates charged by the SNB yielded a gain of CHF 970 billion.
Foreign currency investments rose to 728 billion as of June 30th from CHF 714 billion three months ago and 700 billion six months ago, highlighting clearly that the SNB is committed to defending the Swiss franc.
As the SNB declared on Monday: “…financial result depends largely on developments in the gold, foreign exchange and capital markets. Strong fluctuations are therefore to be expected, and only provisional conclusions are possible as regards the annual result”. Therefore, it is hard to draw any relevant forecast regarding the year-end results, especially since those results do not reflect the sharp depreciation of the Swissie against the euro of the last few days.
Last week, the CHF fell as much as 3.60% against the euro sending the EUR/CHF pair to 1.14. We see this sharp appreciation as a catch-up session for the Swissie. Despite a broad-based appreciation of the euro, the Swiss franc held ground, which led directly to a sustained appreciation of the CHF against the USD. However, at some point EUR/CHF could stay completely immune to the euro appreciation. After all, the end of the ECB’s ultra-loose monetary policy will impact the EU/CH interest rate differential. As a result, this is more a healthy adjustment, rather than the end of the CHF overvaluation. The EUR/CHF still has some legs, but I doubt the pair will pass the 1.20 threshold. The 1.15 looks like to be a good equilibrium given the fact the EUR rally is losing steam.