Price action on Thursday suggests nerves at the SNB might have eased somewhat as EURCHF spiked higher to SFr1.2050 on rumours of a possible tax on Swiss deposits. However, franc weakness looks unlikely to last and indeed EURCHF is grinding back down towards the figure at SFr1.20.
That will inevitably lead to the SNB adding to the estimated €50 billion it has spent during the past week in defending the SFr1.20 floor.
The SNB has not been sitting on those EUR, however. It has been spreading its risk, with some speculating it has started to add SEK and NOK to its reserves.
| EURSEK and EURNOK fall in tandem |
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| Source: Bloomberg, Citi |
The diversification strategy makes sense. The central bank appears to have learnt its lesson after the heavy domestic criticism it received after racking up losses of billions of francs during its unsuccessful campaign to stem the rise of its currency in 2009 and 2010.
Readers might recall that quarterly reserve data from the SNB highlighted how the central bank was diversifying out of its EUR holding in the first three months of this year.
The main target of the SNB’s affections in the first quarter was GBP, which rose from 4.2% to 8.5% of the central bank’s SFr245.5 billion-worth of reserves, while it also raised the proportion of USD in its cash pile from 22.9% to 26.0%. Its EUR holding dropped from 57% to 50.5% of the total.
However, the SNB’s holdings of other currencies – which it defines as everything except USD, EUR, GBP, JPY and CAD – held steady at 3.3% reserves.
That might be changing, with the SNB starting to buy Scandinavian currencies as the pressure to recycle out of EUR intensifies, as its SFR1.20 floor comes under increasing attack.
Indeed, as EURGBP and EUJPY resumed their slide on Wednesday, and EURUSD dropped to a multi-year low, EURNOK and EURSEK moved lower as well.
That is at odds with the reaction to high-risk aversion in the markets of late, which usually weakens demand for NOK and SEK.
Citi strategist Valentin Marinov believes that is the result of action from the SNB.
“What is striking is that not only did the two Scandi-currencies gain ground against EUR but they did so in almost perfect tandem,” he says.
He says the last time there was such a pronounced and synchronized depreciation of EURNOK and EURSEK was in the days after the introduction of the EURCHF peg in September 2011. Media reports later suggested the SNB was quick to diversify some of its EUR-proceeds from the FX intervention and buy Scandies, says Marinov.
“Anecdotal evidence and media reports suggest there has been a persistent bid just above the SFr1.20 floor for EURCHF that helped absorb the renewed investors demand for CHF over the last few days,” he says.
“We notice that the selling pressure on EURNOK and EURSEK intensified at times of sustained buying
of EURCHF.”
Wednesday’s price action in the three EUR-crosses, says Marinov, seems consistent with the interpretation that the buyer of EURCHF – the SNB – was quick to diversify into Scandies soon after completing the EUR purchases.
That would seem to make sense and imply that EURNOK and EURSEK can fall further, as long as the SNB manages to sustain the floor in EURCHF.
The next set of quarterly reserve data from the central bank should make interesting reading.