That suggests a main source of selling pressure on the EUR has run its course, unless fresh concerns over eurozone sovereign debt resurface, or some other factor emerges, to spark fresh haven demand for the CHF.
Data released on Wednesday showed the proportion of EUR in the SNB’s SFr429 billion stockpile of foreign currencies dropped from 60.1% to 49% in the third quarter.
At first glance, that might seem like the SNB was losing faith in the EUR project despite July’s pledge from Mario Draghi, European Central Bank president, to do whatever it takes to save the single currency and the subsequent rally in the currency after the introduction of the central bank’s new sovereign debt buying scheme.
However, in reality, the drop in the SNB’s EUR holdings merely serves to illustrate the difficulties it had in recycling its growing stockpiles of EUR in the second quarter.
Demand for CHF rocketed in April, as fears about a Greek exit of the eurozone heightened. That forced the SNB to intervene aggressively to maintain its SFr1.20 floor in EURCHF, sending its FX reserves up to record levels. It consequently struggled to diversify those EUR into other currencies in the second quarter, as the single currency came under intense selling pressure.
However, with better sentiment surrounding EUR in the third quarter, which lifted EURCHF off its SFr1.20 floor, the SNB was able to rebalance its reserves to levels it has been traditionally comfortable with.
“The residual recycling that hadn’t been done at the end of Q2 was all done in Q3 to the point that the share of EUR is now where it should be,” says Adam Cole, global head of FX strategy at RBC Capital Markets.
“Given that they have stopped intervening and for the moment EURCHF is well off the floor, the EUR selling that was coming from the SNB is over for now.”
Currency allocation of SNB FX reserves (%)
The beneficiary of SNB diversification in the third quarter was USD, which rose from 22% to 28% of the central bank’s reserves.
Geoffrey Yu, FX strategist at UBS, estimates the SNB has a quota of holding anywhere between 50% to 55% of its reserves in EUR and about 25% in USD.
Those USD holdings are, therefore, now around levels that prevailed before the intense buying pressure on the CHF developed in the second quarter.
“It’s a simple diversification case,” says Yu. “The SNB is going back to its original weightings.”
The fact that the SNB has rebalanced its reserves also has implications for other EUR crosses, which should come under less selling pressure.
The central bank raised its holdings of GBP, JPY, CAD and ‘other’ currencies in the third quarter, restoring them to levels seen earlier in the year.
The other currencies consist of AUD, SEK, DKK, SGD and KRW. The SNB has been a consistent buyer of those currencies, with its allocation of reserves to them rising from zero two years ago to 4.15% by the end of the third quarter.
That demand should abate for now.