Reserve data point to fading SNB commitment to EURCHF floor
The Swiss National Bank’s (SNB) disposal of euros in the first quarter suggests it might abandon its attempts to rein in the franc, despite protestations to the contrary.
Figures showed the value of the SNB’s euro holdings dropped from SFr124.1 billion to SFr146.7 billion in the first three months of the year. The last time the central bank sold euros to that degree was in the third quarter of 2010, when it allowed EURCHF to drop to record lows after it abandoned an unsuccessful and costly campaign to weaken the franc.
SNB selling EUR at levels not seen since Q3 2010
|Source: SNB, Haver Analytics, Morgan Stanley|
That aborted intervention campaign sparked a wave of internal criticism of the central bank as it racked up a balance-sheet loss of SFr21 billion.
Since then the SNB has re-entered the market, in September 2011, imposing a SFr1.20 floor in EURCHF in a bid to protect its exporters, as investors sent funds from the stricken eurozone to the relative safety of Switzerland.
Thomas Jordan, SNB chairman, has recently restated the central bank’s intention to defend the floor with all means necessary.
However, Dara Blume, strategist at Morgan Stanley, believes that commitment might be waning.
She points to the fact that as well as heavy euro selling, the share of the SNB’s euro holdings as a percentage of its reserves is also falling, which is also reminiscent of the aborted 2009-2010 intervention campaign.
“This is a signal that the SNB could struggle to maintain the SFr1.20 floor in the months to come,” she says.
In 2010, the share of euros in the SNB’s reserves rose to 71% as a result of its intervention campaign, but it dropped sharply to 56% between the second and third quarter of 2010 as it let EURCHF break out of its range.
The SNB’s euro holdings dropped from 57% to 50.5% of its total reserves in the first quarter of 2012.
SNB decreasing EUR exposure
|Source: SNB, Morgan Stanley|
Blume notes that about 80% of SNB FX reserves are invested in government bonds and about 80% of those holdings are AAA rated. That means, as European credit ratings come under pressure, the SNB might be forced to diversify into safer assets – such as gilts.
“The SNB is under considerable political pressure to maintain a sound balance sheet, particularly given its 2010 annual loss,” she says.
“As a result, further credit deterioration as a result of the eurozone difficulties could make it hard for the bank to continue to defend EURCHF.”
Blume believes the floor will hold in the near term, but further out she says it is a question of “when not if” the SNB caves in and abandons its efforts to rein in the franc.
“The net reduction in EUR exposure suggests the SNB’s commitment to the floor, or its ability to maintain it, could be fading,” she adds.
“Ultimately, the SNB will be overwhelmed by flows from Europe.”