CHF: Swiss Reserves are Not What They Seem - BBH
Research Team at BBH, suggests that the news that Switzerland's reserve rose to a new record high of CHF602.1 bln in May from CHF587.9 bln in April spurred talk that the SNB has been intervening covertly.
“One media account cited one trader terms that the intervention as "massive."
We are skeptical. Given the massive holdings of foreign currencies, we suspect that the swing in valuation likely accounts for an apparent increase in reserves. The reserves are reported in Swiss francs and fell against both the euro and the dollar in May.
Using the allocation the Swiss National Bank published for Q1, the dollar accounted for a third of Swiss reserves and the euro accounted for 42%. The franc fell 3.4% against the dollar in May. That alone accounts for nearly half of the change in the franc-valued reserves (1.1% of the 2.4% increase).
The Swiss franc lost 0.6% against the euro last month. That translates into another 0.25% increase in SNB reserves. The euro and the dollar account for 75% of the reserves. Sterling and the yen equally combine for another 14% of the Switzerland's reserves. Sterling's 2.5% appreciation against the franc more than offsets the yen's 0.4% fall against the franc. The two combine for a contribution on par with the euro for the change in Swiss reserves.
The remaining 11% of Switzerland's reserves are in a wide range of currencies. The Canadian dollar has a 3% share of Swiss reserves, leaving the Australian dollar, Danish krone, Chinese yuan, Swedish krona, and Singapore dollar to account for about 8%. These currencies were mixed against the franc. Not knowing the weights of these last six currencies, and small holdings of additional currency exposures in the equity portfolios, it may be prudent to assume that net-net these currencies were neutral for the valuation of Swiss reserves.
This exercise shows that changing valuation of currencies can account for the roughly two-thirds of the increase in the franc-valuation of Switzerland's reserves. The SNB reports that about 80% of its reserves are held in foreign bonds (68% in government bonds and 12% in other bonds). Bonds rallied in May. The Swiss National Bank holds invests a fifth of its reserves in equities.
Rather than "massive intervention", our rudimentary attempt to back out the shift in valuation suggests little intervention likely took place.
In conclusion, we make two points. First, the increase in Swiss reserves appears to be explained by valuation swings not be "massive" intervention. Second, for asset managers and other corporations, the most efficient way to position for the UK referendum is not taking on exposure to a different currency, like Swiss francs, even if one's charter allows for naked currency positions.”