Swiss banking data show accelerating safe haven outflows – Deutsche Bank

Robin Winkler, Strategist at Deutsche Bank suggests that they believe that the Swiss franc would remain under pressure from structural outflows as Swiss corporates and institutional investors are gradually increasing their FX exposure at the same time as foreign investors are withdrawing safe haven assets as Eurozone risks abate.

Key Quotes

“With the SNB due to present quarterly BoP data for July-September only two days before Christmas, it isn't easy to show these two drivers at work. But there is strong evidence of both in the more timely monthly banking statistics, updated for August yesterday morning.”

“Growing demand for FX liquidity from Swiss corporates is evident since the early summer. The non-bank sector has rapidly accumulated FX liquidity and especially USD deposits since April, reflected in Swiss banks' rising USD liabilities to the domestic sector. Looking at the liability structure in more detail, the increase comes from deposits rather than the banks shifting their wholesale funding toward FX. This suggests that demand has come more from corporates than institutional investors. In any case, Swiss banks have seen growing short USD exposure in their balance sheets this year, which they have likely hedged by buying dollars via off-balance-sheet derivatives.”

“But the important new information from the data released this morning is that foreign safe-haven outflows are becoming more dominant. In August alone, foreign counterparties of Swiss banks--including foreign-owned banks and branches of foreign banks which traditionally channel the majority of safe haven flows--reduced their CHF assets by 20 billion, or 10%. The rate of change matters more than the magnitude, seeing as foreign investors are likely to hold the majority of safe haven assets in portfolio assets and real estate rather than cash. It's also worth mentioning that the decrease in foreign CHF liabilities is attributable to the money market and banks while customer deposits were largely unchanged. This indicates that outflows have come from institutional rather than retail investors. Similar to the safe haven inflows during the Eurozone debt crisis, however, retail investors are likely to jump onto the bandwagon with a lag.”

“In conclusion, the fresh data provide strong evidence not only of the Swiss domestic sector taking more FX exposure but also of foreigners increasingly withdrawing safe haven deposits. We target 1.20 in EUR/ CHF by 2018.”