MONETARY POLICies
bases its decisions on the three criteria of security, liquidity, and return. It meets the requirement for secure investments by holding a substantial part of its portfolio in the form of government paper. The SNB achieves a high level of liquidity by holding a large part of its foreign currency reserves in the world’s most liquid currencies and securities markets. In addition, there is scope for diversification into other investment instruments. Broader diversification into different investment categories improves the risk/return profile of the assets.”
As far as asset allocation within Europe goes, the SNB is restricted to investing in issues with a “combined investment grade rating from the leading rating agencies”. This rules out Greece, but allows investment in the rest of Europe. There has been some discussion that the SNB should make a point of buying peripheral debt in easing the Euro zones debt crisis the SNB could contribute to an easing in the underlying tensions that have propelled CHF higher. This is a superficially attractive proposition but one that I doubt will gain much traction with the SNBs reserve managers. A recent story in the FAZ newspaper, covered also in the WSJ, claimed that the SNB would confine its purchases to German and French paper. Such a choice would seem entirely reasonable for a central bank that lacks the balance sheet strength of its Asian counterparts, whose 84%
of assets are currently invested in AAA-rated and has a “security, liquidity and return” guideline for the investment process.
THE QUEST FOR THE ‘SAFE- HAVEN GRAAL’
A
nother consequence of ‘withdrawing’ CHF from the FX arena, at least in
the free-floating way we were used to, has been to steal from global investors a common instrument of ‘macro hedging’ to protect risky asset and high-beta investments.
From the very same day in which SNB put up a 1.20 EUR/CHF limit to Swiss franc strength, the market started to debate which currencies could be used as the next ‘safe- haven’ for the likely tough times ahead. In particular countries with a sound balance-sheet (i.e. not much public and private debt and possibly positive external balances) seem a good target for what has been called a ‘fiscal hedge’ because it
from the global
is needed to protect investors fiscal crisis that
is menacing most of the Western world. Norwegian krone, Swedish krona,
Singaporean dollar have been the most popular. Some
FX
other nominations were given to the Czech koruna, the Canadian, Australian
dollars. The most optimistic commentators
and New Zealand argue
that even
some Emerging Markets (now to be called Growth Markets according to the BRIC acronym father Jim O’Neill) could do the trick in the perfect world of decoupling.
All the currencies mentioned have positives and potential. As far
as being a proper safe-haven
investment I would suggest caution. What really enabled CHF to rally enormously over the past year was not only inflows seeking a fiscal refuge from the EuroZone but also the massive pre-existing short-base in CHF and the unwind of this funding position when risk-averse times force deleveraging. All the Central Eastern Europe mortgages in CHF are just the most evident example. The currencies, which people are now suggesting could be the new CHF, are generally on the long side of shorter or longer term investors for value or carry reasons, or both. In times of stress (as could be seen even in these days) some (or many)longs are likely to be unwound creating an important headwind to any safe-haven appreciation hope.
Currency ranking based on main criteria
Source: Nomura FX TRADER MAGAZINE October - December 2011 29
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