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The SNB released the latest SDDS data which also include FX reserves figures for October 2012:

FX reserves were CHF424.4bn in October, compared to 429.5bn in September, a fall of 5.1bn (€4.25bn). It’s been a very long time since the SNB reserves actually decreased during a month which is a sign of easing in the Euro area. This is also evident in the EUR/CHF exchange rate chart:

The SNB released data on its FX reserves regarding 2012Q3. Securities investments were CHF342.73bn while deposits 86.58bn in September. Here’s a breakdown for the last few months:

* Sources: [1], [2]

It is clear that the SNB managed to increase its reserves substantially while actually decreasing its deposits with foreign central banks (mainly the ECB). In Euro terms FX reserves increased €53.6bn, securities €71.1bn and deposits dropped €17.5bn. As a result, the growth in its reserves was not reflected on the Eurosystem balance sheet as during 2012H1.

Data on investment assets composition were also released:


What’s clearly impressive is the fact that the SNB was able to diversify out of the Euro and into other currencies such as the US$ and the BGP with Euro share dropping from 60% to 48%. Government bonds also dropped a bit from 85% to 83%. Calculated euro securities holdings went from €154bn in 2012Q2 to €164bn in 2012Q3, a change of only €10bn, despite securities increasing by over €71bn during the same period. In other words (assuming that all of SNB FX reserves are a result of its Euro floor), around €60bn were sold in exchange for other currencies in 2012Q3 which should be considered a large flow.

It will be very interesting to observe how the SNB reserves balances change in September.

The SNB released the latest SDDS data which also include FX reserves figures for September 2012:

FX reserves were CHF429.3bn in September, compared to 420.8bn in August, an increase of 8.5bn. It’s quite certain that Swiss reserve accumulation has slowed down considerably, although it’s not negligible (around €7bn in September). This lower growth should reduce the AAA securities premium introduced by large SNB purchases.

The SNB released its foreign reserves data for August:

Compared with the July data:

  1. The total are CHF420.8bn compared to 408.12bn.
  2. Deposits with foreign banks are now 88.35bn, lower than the July figure of 95.19bn.
  3. Securities holdings are 332.23bn, 19.3bn more than the 312.93bn July figure.

Overall, the SNB increased its reserves by roughly 12bn during August, the month during which the ECB announced its intentions to ‘protect the Euro at all costs’. The increase was moved into securities investments with liquid deposits dropping, probably because short-term money market rates are very low, especially since July.

Compared to April 2012, the SNB securities holdings grew from 221.64bn to 332.23bn. Given the fact that the euro share increased from 50% to 60%, euro securities should have grown from 110.82bn to 199.34bn. In other words, during a 4-month period the SNB was a net buyer of more than €70bn in AAA securities. This represents a significant share of the total supply of ‘safe assets’ (mainly those of Germany, France, Austria, Netherlands and Finland) and the purchases should have pushed their spreads compared to periphery bonds even wider. That amount is almost as large as the ECB SMP purchases of periphery debt during 2011H2. Looking into the effects of the SNB currrency floor on the Euro bond market would be an interesting exercise.

The SNB released its Monthly Statistical Bulletin for September 2012 which among other things contains interesting data on its FX reserves holdings. More specifically there’s a breakdown into securities and deposits holdings, as well as between currencies:

It is clear that during 2012Q2 the SNB did not manage to diversify out of the Euro and increased its net position by almost €80bn to a total of €182.5bn with the Euro exposure remaining at 60% of its total portfolio. In terms of investment breakdown, the SNB moved heavily towards securities:

If the 60% share was maintained in securities holdings, the SNB now holds more than €150bn in Euro area securities, mostly AAA rated (86%) with probably €50bn being acquired in the last few months. According to Standard & Poor’s, the SNB acquired €80bn in securities during 2012 (although the actual number seems to be quite lower) with most of them being French paper, which was one of the main reasons behind the strong performance of French securities during 2012.

The SNB has now become a significant player in the Euro sovereign debt market with its currency floor recycling liquidity back to the core. In a way, it is one more drain from the periphery (where probably most of the Euro outflows to Switzerland are originated) since now both outflows to the core and out of the currency area are not reinvested into the periphery but in AAA Euro core collateral or just held as excess reserve deposits in the ECB (Bundebank).

This pattern is unique to the Euro monetary area where currency (banknotes, bank reserves) holders have several options of high rated assets to invest their holdings, instead of the sovereign debt of the deficit country.

SNB reserve managers decisions now seem to play a significant role in the movements of certain assets classes (such as French paper) and market participants should pay close attention to their actions.

The SNB released its ‘IMF Special Data Dissemination Standard’ for July. What’s important is the FX reserves entry for July which increased to CHF406.45bn (excluding gold) from 365.06bn in June, an increase of 41.39bn or around CHF10bn per week. The pattern of high euro outflows to Switzerland does not seem to be stopping.

By now SNB Euro reserves should be over €200bn, more than 6,5% of the Eurosystem balance sheet or 13% of German tradable debt securities. Its portfolio decisions (since its FX reserves investment is mainly on government bonds) can create large premiums and exacerbate price movements in the Euro government securities market. Since such central bank portfolios usually include medium-term securities and German bunds yields are negative or zero up to 3-year tenors, SNB’s currency floor is probably creating negative income out of its own investment options.

The SNB released its foreign reserves position for June 2012 (here’s a time series XLS). Foreign currency reserves increased from CHF305.9bn in May to 364.9bn in June, an increase of 59bn or €49bn. It is clear that the Euro outflows were extremely high during June, a bit more than €12bn per week.

What was also very interesting is that the SNB released some statistics on its reserve holdings for 2012Q2, mainly currency breakdown and investment categories:

Euro holdings increased from 51% to 60%. Since at 2012Q3 its foreign currency reserves were CHF237.5bn and almost all of the FX inflows during 2012Q2 should have been Euros, a crude calculation would expect Euro holdings to be close to 67%. It is clear that SNB did not diversify a lot of its holdings. Its investment was made in AAA rated government bonds while the worrying part was the fact that duration dropped from 4 to 2.8 years. Given the fact that even the 3Y German bund is now in negative territory (as well as any short-term Eurepo rates) and the SNB pays zero on deposits, the currency floor is now a loss making business for the SNB.

Although central banks do not need equity (as was pointed out by SNB itself) there’s a high risk of the SNB either trying to diversify its holdings (by selling Euros) or ‘strengthening’ the currency floor by adopting a negative deposit rate policy.

SNB released data on its FX reserves for June 2012. They ‘ve grown from CHF305.9bn to 364.9bn, an increase of  59bn or around €49.2bn. ECB’s liabilities to non euro area residents increased by €33.5bn from €116.4bn to €149.9bn during the same period. So it seems that euro outflows kept their strength in June. The difference between SNB and ECB figures probably suggests that the SNB invested a part of its reserves in securites (although FX reserves data also include other currencies and their exact composition is not known for June).

The SNB released data on its foreign exchange reserve holdings for May. If one looks at the monthly balance sheet data he will observe the following:

  • After being quite stable in April, ‘Foreign currency reserves (in convertible foreign currencies)’ increased from CHF237.6bn to CHF305.9bn (a growth of 68.3bn or almost €57bn). SNB’s FX reserves had increased strongly during December 2011 and fell sharply by 27bn till February. They posted an increase of around 10bn during March.
  • Most of the increase was reflected into larger deposits with foreign central banks, which grew by 57.7bn from 15.6bn to 73.3bn, by far the largest number ever recorded (the SNB had almost 30bn funds deposited in December 2011). Deposits are now around 24% of total FX reserves. Securities increased by 10.6bn, to 232.2bn, a figure still lower than September 2011 (253.4bn).

The fact that the SNB chooses to keep its (Euro) FX reserves deposited in the ECB and not invest them in securities might reflect the fact that it considers these flows as temporary but it also has a negative effect for Euro assets. Normally, central banks only keep a small part of their reserves in deposits and invest most of them in liquid risk-free assets (such as US Treasury securities in the case of dollar reserves). In the case of the Eurozone, safe assets supply is rather limited with most sovereign debt securities displaying significant volatility and credit risk. Non investment by foreign central banks keeps a large portion of liquidity supply off the market (negating up to a point ECB liquidity injections which get trapped in SNB reserves).

Looking at the increase in ECB ‘liabilities to non euro area residents’ between 27 April and 1 June (the dates of the corresponding weekly statements) it is clear that the SNB deposit position increased even more than what is reflected in the ECB statements (€40bn for the ECB compared with €48bn for the SNB – if one denominates all the deposit increase in Euros). Based on the most recent ECB statement (22 June), the corresponding entry has increased further to €149.7bn which points to a continuation of euro outflows to Switzerland. Last week’s statement will be quite interesting, since it will reflect the market response to the latest Euro summit decisions.

In the last ECB weekly statement overview i touched (yet again) the issue of ever increasing euro outflows from the Eurozone (probably to Switzerland). These are reflected in ‘liabilities to non euro area residents’ in the ECB weekly statement. In this note i would like to point out that these liabilities only reflect bank reserve account holdings.

Normally, a central bank accumulating foreign exchange reserves (for instance the PBoC or BoJ for dollars) will quickly invest them in ‘risk-free assets’, mainly Treasury notes in order to earn an interest (although central banks do carry out reverse repos in order to also provide counterparties with interest income on their reserve accounts), holding only a small part of their assets in reserve accounts. That’s why we don’t see the Fed balance sheet exploding even though China and Japan have accumulated trillions in dollar FX reserves.

In the case of the ECB though, the corresponding entry seems to grow every week by €10-15bn. That probably means that the corresponding central bank prefers to keep its euro assets in a reserve account in the ECB and not invest them in fixed income assets (although it is possible that the actual assets accumulated are even larger and a part of them has already been invested). Not having an asset class which is considered safe by central bank reserve managers is another indication of the current troubles of the Eurozone, the fact that an increasing liquidity preference can ultimately only be satisfied by a small set of risk-free assets, mainly ECB bank reserves (and probably German bunds). Personally, i find this vote of no confidence quite troubling.

On a related note, Bundesbank’s balance sheet for May shows a large increase in ‘liabilities to non-euro area residents’ of €37.8bn, which basically corresponds to the total increase in ECB liabilities on the same category. So it seems that euro outflows are actually happening from Germany, something clearly negative.

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Kostas Kalevras

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