Banks in Switzerland sought the most dollars since 2008 using an emergency dollar swap facility provided by the Federal Reserve in what is likely to be a bid for easy profits.
In Wednesday’s auction conducted by the Swiss National Bank, 17 institutions took up $11.09 billion. That’s the most since October 2008, when the Global Financial Crisis was raging in the wake of Lehman Brothers’ collapse.
This is the fourth week in a row when banks have accessed the facility. Last Wednesday, 15 banks took up $6.27 billion in funds.
According to economists at Credit Suisse, Swiss banks swap the dollars into francs in order to generate a profit. The lenders can even sell the cash back to the SNB using its reverse repo auctions, or deposit it at the institution to benefit from a positive interest rate.
“We do not believe that the increased demand for US dollar liquidity by domestic banks reflects any liquidity issues in the Swiss banking system”, Credit Suisse economist Maxime Botteron wrote in a report last week.
The dollar swap facility was created during the crisis that began in 2007 as a lifeline to provide safe access to Greenback liquidity, while the SNB’s cash-taking repo auctions are designed to drain excess liquidity from the market.
It’s not clear that Swiss officials are likely to act to stop banks from taking advantage of the facility. Conditions of the dollar auctions are controlled by the Fed, and the reverse repos are a core instrument in the SNB’s current tightening of monetary policy.
All Swiss and foreign banks which have a branch in Switzerland or are registered with Swiss authorities are entitled to participate in the dollar auctions. Credit Suisse expects predominantly smaller banks to take advantage of the profit play.
The world is dealing with falling supply of Dollars as rates rise and money supply shrinks. Tapping swap lines to source dollars which can then be sold for a profit is a handy money making exercise for banks.
It runs counter to the spirit of creating crisis management tools. For now the totals are small but the one thing the financial system is designed to do is take a profitable trade and make it bigger. Before long the totals being drawn down will reach sizable proportions.
The Dollar’s rally is pausing at parity versus the Swiss Franc so there is scope for some consolidation amid a short-term overbought condition.
Schweizerische Nationalbank’s stock has halved this year as the stock market assets it padded the balance sheet with have underperformed. It’s not oversold and approaching the lower side of the four-year range.
The Swiss Market Index is pausing within a medium-term downtrend. A sustained move above 10,700 is the minimum required to signal a return to demand dominance.
The movement today in the Japanese Yen suggests some form of intervention. It is unlikely to be more than a pause if the move was not supported by the BoJ.