EUR: Is SNB The Only Real Buyer?

Data from the Swiss National Bank today confirms what the market has suspected. It intervened in size to defend its cap against the euro last month. The details are not yet available, but on an IMF reporting basis, the SNB said that its reserves rose to CHF495.1 bln (~$490.2 bln) from CHF462.7 bln in November.

There are two components to the CHF32.4 bln increase in Swiss reserves, which represents a 7% increase from the November. The first is a change in valuation caused simply by the change in exchange rates. It is difficult to determine precisely how much of the change in the value of the holdings was a result of changing exchange rates. The preliminary data does not provide a breakdown of the currency allocation of Swiss reserves.

In September, the SNB held 45% of its reserves in euros and 29% in US dollars. It drops off sharply after those two. The yen is the third largest holding at 9% followed by sterling at 7%. The Canadian dollar (4%) and others (6%) round out the reserves. The franc was flat against the euro in December. The franc lost about 3% against the dollar, 2% against the yen and 2.5% against sterling. Roughly speaking, then, the valuation can account for around 1.5 percent of the 7% increase in the Swiss franc measure of SNB's reserves.

The second component of the change in SNB reserves is the intervention. Officials did indicate that SNB intervened in December. The upward pressure on the currency was emanating not only from funds fleeing the euro area, but also from Russia, which was experiencing its own financial crisis and plummeting ruble. Our back of the envelop calculation suggest that the SNB bought around 20 bln euros in December. Given its past behavior, we would expect the SNB to diversify out of the euro and buy dollars, yen and sterling.

The euro buying by the SNB stands in stark contrast to other central banks, which are believed to be continuing to sell euros after they reduced their holdings in Q3, according to IMF COFER data released at the end of last year. The depreciating currency and low rates may be encouraging official asset managers the same as it is encouraging private investors to reduce euro exposure.