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Foreign Exchange

SNB envy: what Zurich can teach Tokyo

Switzerland appears to be giving Japan an object lesson in how to intervene on the currency markets.

 

Officials in Tokyo must be looking jealously at the Swiss National Bank as they try to rein in the strength of the yen. Market estimates suggest that the Bank of Japan spent a record Y8 trillion ($103bn) on Monday to halt the yen’s rise after it hit a fresh post-war high against the dollar, almost double the previous record of Y4.5 trillion in August. Even then, the yen quickly found buyers at lower levels.

In contrast, Barclays Capital estimates the SNB has spent just $6bn since its bold move to impose a, to date, rock solid SFr1.20 floor in the euro against the Swiss franc on September 6.

The fact that the floor has not been significantly tested, Barclays Capital says, reflects the credibility of the SNB’s move in the eyes of the market.

“The Bank of Japan and the Ministry of Finance would like to mimic the success of the SNB – call it SNB envy on the part of the Japanese if you must,” says Stephen Gallo, head of market analysis at Schneider FX.

This is quite a turnaround for the SNB, which only last year was facing heavy domestic criticism for racking up a SFr26.5bn paper loss on its largely unsuccessful campaign to weaken the Swiss franc in 2010.

Indeed, the SNB this week announced a consolidated profit of SFr5.8bn for the first three quarters of the year. The central bank says the gold price and current interest rate situation had resulted in high valuation gains on gold and fixed interest rate investments.

It adds: “The SNB result depends largely on developments in the gold, foreign exchange and capital markets. Consequently, strong fluctuations are normal, and only provisional conclusions are possible as regards the annual result.”

Simon Smith, chief economist at FxPro, says this begs the question whether the SNB is a central bank of a hedge fund. Perhaps this reflects the early career of Philipp Hildebrand, SNB chairman, who was a partner at Moore Capital, the hedge fund, in the 1990s.

“The key difference though is that the SNB can effectively manipulate the main market in which it is present, namely that of Swiss francs,” says Smith.

FxPro estimates that, based on the weighting of the SNB’s third-quarter foreign exchange holdings, which were published this week, the decision on September 6 to put a floor in the value of the euro against the Swiss franc saw a substantial turnaround in the central bank’s fortunes.

On that day alone, FxPro calculates that the SNB could have made as much as nearly SFr18bn on the resultant FX moves.

Furthermore, the weighting figures revealed that the SNB is taking care to diversify its holdings.

Unlike its counterparts in Asia, such as the People’s Bank of China – which has been looking to diversify away from the dollar – the SNB is reducing its exposure to the euro.

As a proportion of its total FX holdings, the share of euros fell from 55.3% in the second quarter to 50.7% in the third quarter of this year. In mid 2010, when the SNB was last intervening to weaken the Swiss franc, the share of euro holdings rose to as much as 70%.

Meanwhile, the dollar represents 34% of reserves, up from 25% in the second quarter and the highest proportion for five years.

With the uncertainties in the eurozone, it seems that the SNB, like many others, is turning towards the relative safety of the dollar.

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