SNB report solid interim results
The Swiss National Bank published interim results for the first three quarters of the year. After mixed mid-year results – the SNB reported an interim profit of CHF 1.2 billion – the last update brought the smile back to the SNB and all Swiss cantons. As of 30 September, the SNB reported a profit of CHF 33.7bn, which results mostly from a profit on foreign currency positions (30.3bn). Gold holdings appreciated by CHF 2.3bn. The central bank made a profit of CHF 1.5bn from negative interested it charges.
Looking at the details, the SNB benefited from a solid equity market that increased the valuation of its equity positions by CHF 14.4bn, plus a dividend income of CHF 2.5bn. On the other hand, the central bank suffered a valuation loss of CHF 4bn on its bond positions that was however offset by an interest income of CHF 6.8bn. Finally, the continuous depreciation of the Swiss franc over the summer months allowed the SNB to record exchange rate-related gains of CHF 10bn. Indeed, on a trade-weighted basis the Swiss franc fell more than 4.1% between July and September. The CHF depreciation was particularly pronounced against the EUR (-4.50%), the British pound (-4%) and most Scandinavian currencies.
Although Swiss cantons will almost surely receive a piece of the cake, they will have to wait to get the final result and the year is not over yet. The Swiss franc really had a nice ride over the last few months, however one cannot rule out a slight correction as investors are slowly trimming their risky positions as we move into the next year. On Tuesday morning, EUR/CHF has stabilized at around 1.16.
JPY reliant on US policy
As was widely expected the BoJ held its policy strategy unchanged. The vote was 8-1 with the lone dissenter (policy board member Goushi Kataoka) voting for additional easing measures such as examining 10 year 0.0% and 15 year 0.20% yield targets. In their quarterly outlook report, the bank downgraded core inflation forecasts to 0.8% from 1.1% in 2017 and 1.4 from 1.5% in 2018. Member continued to expect their 2% inflation target rate would be reached by 2019. A bright spot was growth, which was revised marginally higher to 1.9% from 1.8%. At the accompanying press conference Governor Kuroda reiterated, that discussion of exit strategy was premature.
Effect on JPY was muted, as USDJPY was range-bound between 112.95 and 113.25. In regards to FX, BoJ policy is losing effectiveness to debase the JPY as years of Abenomics has exhausted traders. Any adjustment in the BoJ ultra-accommodative policy would be unlikely unless CPI climbed well above 1% in a smooth trend. However, markets could see micro tuning with slowing its purchasing this year limitations on the volume of JGBs in rotation, but a maintenance of YCC should not be a problem.
FX prices has reconnected with US yields (especially US 10yr yields) indicated that the fate of USDJPY is no longer in the hands of BoJ but dependent on policy decision in the US. The failure of the USDJPY to break 115 suggests correction to 112.30 to loosen extended longs. PM Abe recent decisive electoral victory and probability that BoJ Governor Haruhiko Kuroda will be reappointed in April indicated JPY weakening policy will remain although less effective, in effect.
