Monday, 16 July 2018

Reservations about Swiss reserves

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Who can’t remember when, in August last year, the Swiss Franc was a mission towards parity with the Euro? The Swissy was being bought blindly in a flight to quality move which appeared to be unstoppable.

Anthony Peters, SwissInvest Strategist

All the while, the Swiss economy was being strangled to death by the boa constrictor of Europhobia. Then, in an act of incredible courage, the Swiss national bank declared that it would floor the exchange rate at SFr1.2000 – cost what it will.

Since then it has sat there like the spider in the centre of its web, ready to pounce on any trader who dares to push the exchange rate anywhere close to the critical level. This is like not the common lines in the sand which we have seen drawn throughout the eurozone crisis which markets have laughed at and which have had as much credence as reports of a sighting of the Loch Ness monster. The SNB has stood squarely behind its pronouncement and since September 5th 2011, the high water mark (or should that be low water mark?) has not been breached. Bully to the SNB.

“We are convinced that this policy is effective, and shall continue to pursue it with the utmost determination”

However, there has always been concern as to how much the SNB has had to do to keep the exchange rate floor in place and what it will have done with all the reserves it has accumulated in the process. Well, yesterday we finally got an insight into what it feels like to be sitting on over SFr420bn of currency reserves.

To briefly put that figure in context, Switzerland has a population of around 7.9 million which would give reserves of roughly SFr53,000 for every man, woman and child. That is more or less US$56,000. Compare that with “gargantuan” Chinese reserves of US$3.2 trillion split between an estimated population of 1.344bn which computes to per capita reserves of US$2,380 and you begin to get my drift.

So, yesterday Fritz Zurbruegg, a member of the governing board of the SNB stood up in Geneva and opened the door just by the tiniest crack in order to let us see what the Bank is up to. To start with, Zurbruegg was not there to shoot his organisation in the back so it all dealt with justifying the permanent intervention mechanism and he opened: “We are convinced that this policy is effective, and shall continue to pursue it with the utmost determination.”

Now there’s a surprise.

S&P takes SNB to task

However, reserves are have now risen to near on 70% of GDP and there has been much speculation around markets as to what the SNB is doing with its cash pile.

Standard & Poor’s, with its legendary skill at assessing sovereign risk, has been vociferous in its accusations that the SNB has been vitiating the eurozone crisis by recycling its reserves into only the highest quality of bonds, thus exacerbating the spread differential between the good, the bad and the downright ugly.

Zurbruegg put up a vigorous defence by telling us: “Moreover, to ensure that our investments don’t destabilise markets, we place amounts that they can easily absorbed.”

Still, he did admit that it is a major challenge to invest the central bank’s portfolio without influencing financial markets.

In a world where we are consistently facing the problems generated by reckless spending and economic failure, it seems mad that the most successful have to begin to defend themselves too. It must be said that S&P went out on a limb when they took the SNB and its investment policy to task and not too many others out there agree with them but it was enough to prompt the Zurbruegg justification speech – although the name of the agency was never in fact mentioned.

We all know that the SNB has been dancing fandangos in its attempt to recycle the reserves and that it is beginning to run out of safe havens. It has not only been buying euros but has been selling francs on the crosses against Aussie, Canadian and all comers.

Of course one can accuse the SNB of causing disruption in markets. It has. But has what the Fed, the BoE, the BoJ and the ECB done been any less disruptive? Do we in fact know any longer what real and open markets look like any longer? I commented on Wednesday that Ben Bernanke had won the election for O’Bama, not O’Bama – and I was quite serious about that.

Zurbruegg told us that Swiss reserves hold a fluctuating proportion of euros which ranges from 45% to 65%. That means that at the peak it holds around €270bn. Where would the currency be trading without that support?

He added that the SNB corresponds with the central banks of the countries it invests in. I’m sure it does, as sure as I am that it doesn’t have the number for the central bank of Greece or Cyprus on its speed-dialler.


Alas, it’s that time of the week again. All that remains is for me to wish you and yours a very happy and peaceful week-end. This week-end the world reverts to normality as first of the autumn internationals are played between England and Fiji. Hail rugby, a game invented by hooligans and played by gentlemen as opposed to that silly thing with the round ball which was invented by gentlemen and is played by hooligans. I wonder if that comment will make it past my honourable, footy-mad editor? 

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