SNB Continued Franc Sales in Second Quarter, Stemming Flows

(Bloomberg) — The Swiss National Bank continued to sell francs in the second quarter, following through on its “increased willingness” to intervene against a stronger currency.

Switzerland’s central bank purchased foreign exchange worth 1.4 billion francs ($1.7 billion) from April through June, according to data on Wednesday. That’s down from the 3.9 billion francs it bought in the first three months of the year.

That suggests officials were forced to offset continued haven flows into Switzerland triggered by the Iran war in the period.

The surge in the franc at the start of the conflict prompted the SNB to declare its heightened readiness stance in a rare unsolicited statement in March, though it has since reverted to more neutral language.

The Swiss currency started and ended the period at essentially the same level of around 0.92 francs per euro. Since July, it has weakened considerably, retreating some 2.4%.

Before the report, UBS economist Florian Germanier estimated that interventions were close to zero in the period, and even cited the possibility of minor franc purchases.

The central bank’s resolve to keep intervening has taken center stage in its communications. After the initial intervention threat in March, officials kept it up in several speeches throughout the quarter. In April, SNB President Martin Schlegel said the SNB had unrestricted room to maneuver on rates and interventions.

In June, policymakers softened the message slightly, adding that they have increased willingness to intervene “if necessary” to their previous language. They also acknowledged looser monetary conditions after the franc had fallen from March levels. Still, they didn’t drop the threat before their monetary-policy decision last week, when they returned to pre-Iran war language.

Swiss interest rates have been at zero for over a year, with the franc a key focal point for SNB policymakers because its weigh on inflation via lower import costs.

Consumer-price growth was 0.8% in August, despite energy price spikes from the Iran war. September inflation data are due on Thursday, with economists predicting a further increase, but the rate remains much lower than in comparable economies and comfortably in the SNB’s 0-2% target range.

With interest rates at zero, officials have exhausted easing space, aside from the drastic and damaging option of reintroducing negative borrowing costs. That makes currency interventions an important tool for Swiss officials alongside the interest rate.

By buying assets in foreign denominations, the central bank can weaken the exchange rate. Swiss officials used this mechanism for several years through 2022 to keep a lid on the franc. That swelled the SNB’s balance sheet to a size some observers deemed precarious.

Schlegel has stressed that the SNB doesn’t target a specific exchange rate, adding that officials judge the franc’s strength against a basket of currencies and alongside other factors when assessing monetary conditions.

The central bank only publishes data with a three-month delay, so the third-quarter tally won’t be revealed until Dec. 31.

–With assistance from Kristian Siedenburg and Joel Rinneby.

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