The SNBs FX reserves have risen to record levels as a consequence of the central banks decision in September 2011 to enforce a SFr1.20 floor in EURCHF in a bid to protect the Swiss export sector from what it deemed the excessive overvaluation of the franc.
The SNB has admitted that managing those reserves which stand at a record SFr445.6 billion, or more than 70% of Swiss GDP has been a problem.
Still, reserve accumulation had stabilized in recent quarters as the improving situation in the eurozone sovereign debt market lessened haven demand for the franc.
In March, however, those reserves rose by SFr8 billion.Changes in the currency allocation of the SNBs stockpiles, which the central bank releases quarterly, might point to a reason for that rise.
SNB reserves by currency (SFr billion)
Figures released on Tuesday show that while the SNB marginally decreased the share of its euro and dollar holdings in the first quarter, it increased its holdings in other currencies (which include the Australian dollar, Swedish krona, Danish krone, Singapore dollar and Korean won), and perhaps more surprisingly its yen holdings.
The fact the SNB raised the share of other currencies in its holdings from 4.2% to 5.6% in the first quarter is not that startling. Indeed, it is in line with the shift away from traditional reserve currencies such as the dollar, euro and sterling reflected in the IMFs Cofer data, which track the currency allocation of the worlds FX reserves.
The latest Cofer data, for instance, showed that global reserve managers raised their holdings in other currencies from 7.1 % to 7.6% in the fourth quarter of last year.
However, the fact the SNB raised its yen holdings by more than SFr3 billion from 8% to 8.5% of its reserves in the first quarter of this year goes against the trend, which has seen global reserve managers reduce the proportion of their stockpiles held in the Japanese currency in recent quarters.It is telling, however, that the SNB has chosen to increase its yen holdings as the Japanese authorities embarked on a drive to reflate their economy, a main pillar of which is a determination to weaken their currency.
Yen weakens sharply
Valentin Marinov, strategist at Citi, says the data suggest the SNB exploited the excessive yen depreciation in recent months to expand its yen holdings relatively cheaply.
One could even argue that the timing of the yen purchases was in part driven by the excessive appreciation of CHFJPY, he says.
Some Swiss manufacturing exporters are competing with Japanese firms in the European and US markets, and the latest yen purchases by the SNB may have been aimed at smoothing the appreciation of the cross.
If that is the case, then investors should expect to see a further rise in the SNBs FX reserve in April, given that the yen plunged after the Bank of Japan surprised the market early last month with aggressive quantitative easing plans aimed at doubling its balance sheet in a bid to revive the Japanese economy.
Although the headline figure for the size of the SNBs FX reserves is released monthly, the full extent of the SNBs activity in the yen will not be revealed for another three months when the central bank reveals the shift in its reserve allocation in the second quarter.
In the meantime, it is worth considering that the SNB might frustrate yen bears.