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SNB balance sheet allows for rise in EURCHF floor

Details of the Swiss National Bank’s balance sheet suggest that the central bank is in a good position to raise the floor in EURCHF to 1.25.

The SNB has repeatedly said the franc is still overvalued despite imposing a floor of 1.20 in EURCHF in September. Speculation that the central bank will move to raise the floor has intensified in recent days, as Swiss economic data has show that the country is struggling to cope with the strength of its currency.

On Wednesday, Switzerland’s KOF leading indicator slumped, while on Thursday manufacturing PMI came in far worse than expected.

The SNB’s balance sheet shows that total FX reserves fell by SFr40 billion in October, indicating that the central bank’s floor in EURCHF has not been tested by the market and that it has not had to intervene significantly in the spot market.

Instead, changes in the SNB’s FX reserves have been driven by the forward legs of the FX swap positions that the SNB entered into in August with the aim of weakening the franc by introducing large amounts of liquidity.

It led to an increase in the SNB’s FX reserves, offset by a short forward position in foreign currencies. In September, the bank rolled most of the maturing forwards over, but in October $34 billion of the short forward positions were allowed to expire.

 Recent changes in the SNB's reserves stem from liquidity operations

 Source: SNB, Barclays Capital

Barclays Capital says it is closing these positions, which would have required selling reserves, which led to the decrease in the size of the SNB’s stockpiles.

“We believe the changes in the SNB's reserves stem from the liquidity operations initiated in August before the EURCHF floor, rather from action taken to defend 1.20,” says Raghav Subbarao, FX strategist at Barclays Capital.

He says the balance-sheet data supports the view that the SNB might raise the floor in EURCHF.

“First, the fact that the SNB has not been required to aggressively defend the floor might make it more comfortable with a higher level,” says Subbarao.

“Second, any weakening of the franc would lead to a loss on the short forward positions that the SNB holds on its balance sheet. Therefore, the reduction in the SNB's short forward position gives it more freedom to weaken the franc.”

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