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SNB currency reserves’ rise reinforces credibility of SFr1.20 floor, strategists say

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A rise in September of Swiss National Bank (SNB) holdings of foreign currency reserves does not necessarily mean that the central bank is going to begin diversifying its holdings any time soon, say two FX strategists.

SNB currency reserves rose by SFr8.5 billion to a record level of SFr429.3 billion last month. The fact that the EURCHF level is strongly above the SFr1.20 floor at the start of October reinforces market sentiment that the SNB is determined to maintain the floor long-term, say the strategists. Credit Suisse FX strategist Aditya Bagaria says, when adjusted for FX valuation, the SNB’s foreign currency reserves likely rose by only SFr7.5 billion, given that the Swiss trade-weighted index – a measure of CHF appreciation or depreciation – declined by 0.2% in September. Instead of focusing on SNB foreign currency reserve levels going up, the FX market should look to the declining pace of the central bank’s foreign currency reserve accumulation as the clearest sign that the SFr1.20 floor is here to stay, says Bagaria. “Declines in the pace of reserve accumulation in August and then again in September is good news for the SNB,” says Bagaria. “It reinforces the credibility of the SFr1.20 floor to the market and the SNB should be relieved, given that it had to expand its balance sheet aggressively in Q2.” UBS FX strategist Geoffrey Yu adds that an increase in the SNB’s foreign currency reserves in September is a natural function of the central bank’s policy of intervening in the FX market only when CHF value is pushed close to the SFr1.20 level. Yu says the SNB would likely only feel forced to begin selling foreign currency reserves again if the EURCHF level approached a range of SFr1.2010 to SFr1.2015. “There is less pressure on the SNB to move right now,” says Yu. “We do not think they are actually active in the markets on the FX side right now, but overall they should be happy where the CHF is right now.” Bagaria and Yu say the SNB’s build-up of foreign currency reserves last month gives the central bank’s Q3 FX reserve diversification figures – which Yu says are due out on Monday – an added level of importance. In June, the SNB showed diversified Q2 foreign currency reserve holdings increasing its holdings in other currencies by one-third, suggesting an underpinning of demand for CAD, AUD, SEK, DKK, SGD and KRW. In September, 60% of SNB FX reserves were seen held in EUR, representing a break from the normal FX reserve level for SNB EUR holdings of around 50%. Yu says the 60% EUR holdings figure indicates that the SNB did not want to crowd out its holdings of other currency reserves, such as AUD or SEK, for example. However, Credit Suisse’s Bagaria argues that some diversification in SNB EUR holdings could emerge in the third-quarter figures.

“I would expect the SNB has been behind some recent diversification of EUR holdings after experiencing an increase in EUR holdings in Q2,” he said. “I would be surprised if the SNB decided to hold on to all those EUR.”