MONETARY POLICies
intervention, in a similar manner to many emerging market countries. With the interest rate differential between Switzerland and the rest of the developed world close to zero, sterilized intervention is possible while maintaining
the exchange
rate target. Things will change if the SNB is forced to raise interest rates due to rising inflationary pressures however. Switzerland does not have a closed capital account like China: it can pick between an exchange rate or interest rate target, but not both.
International investors and Swiss taxpayers
There is a risk that the SNB will create the wrong incentives to investors fleeing
the EuroZone
sovereign debt crisis. Together with current account recycling flows, it is these investors who have been the main driver of Swiss franc strength rather than speculative flows. By setting an explicit lower bound to the exchange rate, the SNB is reducing volatility in the cross and creating additional incentives for investors to swap out of European and into Swiss-denominated assets. EuroZone risk is effectively being transferred from private-sector balance sheets to Swiss taxpayers. If teh euro area debt crisis drags along, the pressure towards a stronger Swiss Franc will continue and the SNB will have to undertake very large intervention amounts going forward. The extent to which the tough political and macroeconomic decisions outlined above will
be taken to sustain SNB policy
beyond a few months, remains to be seen. Especially if combined with significantly higher inflation, the political climate, currently favoring a support to a (supposedly) ailing export sector, could heavily change.
WHAT WILL HAPPEN TO THE EUROS BOUGHT ?
I
f SNB succeeds in preventing further CHF strength or even to weaken it, only time will
tell. It could be interesting, in the meanwhile, to try to speculate on the impact that a protracted intervention could have in the FX and other markets.
The SNB does not have a specific benchmark allocation for reserves, albeit the relative proportions have stayed relatively constant over time. Currently, the allocation is as follows: 25% USD, 55% EUR, 3% GBP, 10% JPY, 4% CAD and 3% in AUD, SEK, DKK and SGD. The
allocation is dynamically
managed, with the portion of reserves denominated in EUR
FX
rising substantially as interventions took place over 2009-10, but then returning to more “normal” levels as the SNB re-balanced over time.
The SNB does therefore have scope to invest in currencies in a different portion to its existing allocations. With the political sensitivities of buying Japanese yen arguably high and the US dollar suffering from its own structural weaknesses, one could make a case for the SNB to increase its allocation to other currencies in its portfolio. This includes AUD, SEK, CAD, DKK or SGD. Beyond that however, the SNB is not precluded from expanding its holdings to other currencies. SNB reserve policy is managed according to principles set out in its “Investment Policy Guidelines”, which do not rule this out.
http://www.snb.ch/en/iabout/ snb/legal/id/snb_legal_rules/3
More broadly, the guidelines state that: “When investing its assets, the SNB
SNB reserve currency allocation
Source: Deutsche Bank FX TRADER MAGAZINE October - December 2011 27
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