MARKET ANALYSIS
The franc may no longer represent an isolated safe-haven currency at its current levels against the euro, but we have always held a ZHOO GLYHUVLÀHG SRUWIROLR RI FXUUHQFLHV ERWK in the major and emerging market world to represent that view. In fact, in many ways the emerging market currencies KDYH EHHQ WKH PDMRU EHQHÀFLDULHV RI WKH UHFHQW FULVHV DV WKHLU ÀVFDO prudence, monetary discipline and political transparency have led the asset class to become a structural
rather than a cyclical story.
partly due to the overall weakness of the US dollar JLYHQ WKH HFRQRPLF ÀVFDO DQG SROLWLFDO FRQFHUQV surrounding the US. The easy question is “What would take the franc back to EUR/CHF 1.4000?”. We believe the answer is some type of resolution to the current euro-zone issues. The hard question is “When?” This we do not know, but we do believe that EU policy makers will do whatever is necessary to ensure the sustainability of the single currency, even if this takes a little longer than markets expect.
Future safe-havens
Finally, now that the franc no longer expresses an isolated safe-haven currency, where will investors choose to invest, and will the measures have consequences for the bond market? In answering this, we have already seen the Norwegian krone appreciating and yields falling as a result of a proxy to the franc within Europe. We have maintained our underweight exposure to the franc partly due to the excessive valuations which made it amongst the most expensive currencies in the world, but also due to our belief that the market was too bearish on both the global economic scenario going forward and the outlook for the euro zone.
It is also important to note that when the SNB intervenes against the markets it will need to invest the foreign currencies purchased into their respective denominated issues. Although the majority of interventions will be enacted in EUR/CHF, we do not exclude the purchase of US dollars as and when appropriate. The euros which are bought would have to be gradually redistributed to the currency allocation of the reserves at that point in time. For example, as at the end of June the currency allocation of the SNB reserves was 55% EUR, 25% USD, 10% JPY, 4% CAD, 3% GBP and 3% Other (AUD, SEK, DKK and SGD).
“The ad-hoc
interventions proved not only to be costly in monetary and
political terms but also damaging to the credibility of the SNB.”
The allocation is dynamically managed, with the portion of reserves denominated in euros rising substantially as interventions took place over 2009-10, but then returning to more normal levels as the SNB re-balanced over time. As for its physical holdings, 84% are Government bonds, 10% Shares and 6% Other bonds. The structure of the bonds are 83% AAA, 14% AA, 1% A and 2% Other.
The guidelines of the SNB restrict it to investing in issuers with a combined investment grade rating from the leading rating agencies. Would they choose to invest some of the euros in peripheral bonds? We do not think they would until there are signs of stability and resolution; security, liquidity and returns are what drive the SNB investment process.
THANOS PAPASAVVAS - is Head of Currency
Management at Investec Asset Management
Autumn 2011 | Currency Investor 45
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