SNB heading down under?

Publication date: 31 July 2012
Author: Simon Smith, FxPro

Tagged with: Simon Smith

It’s no secret that the SNB has been having a tough time defending the 1.20 level on EUR/CHF since it announced a cap on CHF strength back in September of last year, but the latest data contained in its quarterly report shed more light on how this has been achieved. There was a pronounced jump in the proportion of FX reserves held in euros, from just under 51% in Q1 to 60% in Q2. The SNB had been doing a fairly decent job of ensuring that its interventions did not push up euro holdings to a disproportionately large proportion of its reserves, partly by being active in the FX swaps market (SNB data show such activity jumping substantially in the second quarter). This increase takes the proportion of reserves in euros to the highest level for two years.

There are three points to note. First, at some point in the future (but not the near future), the SNB will have to rebalance its portfolio by selling euros. This is perhaps not something to worry about now. Second, the extent of intervention means that the SNB has not found it possible to keep its portfolio more broadly balanced, as has generally been the case up to now. Recall that during the last round of SNB intervention (from early 2009 to mid-2010) the proportion of total reserves in EUR peaked at 70%. Finally, the SNB’s natural preference for top investment-grade securities in part supports the ongoing fall in German yields and the push into negative territory on shorter-dated bonds.

Despite the rise in euro currency holdings, there was also an increase in allocations to ‘other’ currencies, which for the SNB means AUD, SEK, DKK, SGD and KRW. These increased from 3% to 4% of reserves, which may seem small but is notable given the 50% increase in overall reserves in the second quarter. Globally, for those central banks that report breakdowns, the proportion of reserves allocated to ‘non-major’ currencies has more than doubled to 5.2%. There were reports overnight from Australia that the SNB has become more active in buying the Aussie (Bloomberg, citing Australian Financial Review). This can’t be confirmed in today’s data but would not be surprising and adds to the factors that have been working to support the Aussie in recent times.