Breaking The Peg At The Swiss National Bank Of Europe

Tyler Durden's picture


Swiss FX reserves went up by 50% in Q2, about CHF127bn and are now close to 65% of Swiss GDP, a very large number. The assumption is that in the first instance almost all of the initial purchases were of EUR (to support the 1.20 peg). The question is how may of these euros were they able to get out of to limit the SNB’s exposure. As Citi's Steven Englander notes, the extent of diversification matters for EUR, CHF, GBP and small G10 currencies, because limited diversification, say if the SNB has sold less than 40% of the euros bought in Q2, will lead to expectations of selling down the road. By contrast if they have unwound 60 or 65% of their EUR buying more, they face less pressure to sell the rest and probably will have made a decent profit on their FX activities.


Given how much they had to buy and how much selling of EUR there was from other sources, the SNB probably  had trouble unloading the EUR that they bought -- the surprise is more likely to be how high the EUR share in Swiss reserves is, rather than how low.

We get the answer when the SNB publishes its first half results on July 31 (about 1:30AM EDT).  The SNB publishes the currency distribution of its FX reserves as part of these results (Figure 1 presents the end-Q1 percentage allocation of these reserves).  In Q2 Swiss reserves increased by 54% in CHF terms. We estimate that about 2% of this increase was due to CHF depreciation against the currencies in its reserves basket – the rest is the buying of EUR to maintain the EURCHF 1.20 floor.


It has also been reported that the SNB is engaged in heavy diversification efforts. The data that are published will tell us how much they have been able to diversify. The intuition behind the calculation is as follows. If the SNB was unable to diversify any of its reserves, almost all of the 54 percent increase in reserves will show up in the EUR component and other currencies would be essentially constant.  Doing the  arithmetic, this would push up the EUR share to about 67% of reserves. Conversely if they were able to sell all the EUR that they bought, the EUR share would drop to about 33% of the reserves portfolio (Figure 3).


None of these extreme solutions are likely, but we can do calculations for more likely intermediate outcomes and these are also presented in Figure 3. For example if the SNB managed to sell only 25% of the euros that it bought the Q2 EUR share will be just under 60%; if it sold 75% it would be just over 40%.  So if it turns out on Monday that the EUR share is less than 45% it is a good outcome from the point of view of diversification and below 40% an excellent one.


The risk is that if the SNB has been unable  to diversify out of the euros they  bought in Q2. If the EUR share runs above 55% or worse 60%, it would mean that the SNB has had to hang on to a large chunk of their euros. Investors will see greater risk of ultimate capital loss if the peg should break and greater risk of desperation selling of EUR down the road.  This would lead to downward pressure on EUR, upward pressures on the likely diversification targets, and incipient selling  of EURCHF. We do not think an attack on  EURCHF is likely in the near term but as reserves accumulate and if the EUR concentration increases,  there may be more willingness to bet that the SNB will ultimately crack.


Source: Citi

Your rating: None

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 07/30/2012 - 08:43 | 2661890 PaperBear
PaperBear's picture

The first chart is what panic looks like.

Mon, 07/30/2012 - 08:56 | 2661914 malikai
malikai's picture

All I know is they'd better be selling those euros for gold..

Mon, 07/30/2012 - 09:33 | 2661992 BigJim
BigJim's picture

Damn right!

If Swiss central banking hadn't become hopelessly corrupted they'd be weakening their currency by printing money hand over fist to buy physical gold, not bloody euros.

Mon, 07/30/2012 - 10:28 | 2662128 markar
markar's picture

Um. The goal is to weaken the franc against the Euro for trade purposes. Buying gold would not achieve that goal.

Mon, 07/30/2012 - 10:34 | 2662150 agent default
agent default's picture

The goal is loss of Swiss sovereignty, and nothing else.  Unfortunately Swiss central bankers are on the Swiss-EU integration bandwagon. 

Mon, 07/30/2012 - 11:23 | 2662313 malikai
malikai's picture

Print CHF, Sell CHF and Buy EUR to maintain peg, Sell EUR and buy USD, Sell USD and Buy Au.

See how that works?

Mon, 07/30/2012 - 13:33 | 2662744 gwiss
gwiss's picture

I've actually wondered about that.  When you print and purchase other's currency, you are simultaneously leaning on the ratio twice -- once because you are increasing the supply in the market of your currency, and again because you are reducing the supply of that which you are trying to stay pegged to.

But, if you print and simply buy gold, aren't you still increasing the supply of your currency in the market?  Granted, it would only be 1/2 as effective because you aren't simultaneously reducing the supply of your peg target, but in exchange you are getting an asset with no counterparty risk, no?  If you are going to run the risk of inflation, why not do it in exchange for something that everyone owns and no one can print, which really means in exchange for an asset which does not fluctuate with the political whims of a central bank? 


Mon, 07/30/2012 - 08:46 | 2661896 mrktwtch2
mrktwtch2's picture

so will this be the "lehman moment "..for the euro march down to parity..the peg will crack if the whole market starts to lean on them..

Mon, 07/30/2012 - 08:48 | 2661898 PontifexMaximus
PontifexMaximus's picture

No problem at all: Jordan could easily solve the Spanish banking needs (offic. EUR 100 bill) within 2 months puchases of EUR. Solving the bigger problem, Italy, is a matter of another 2 months with the help of the Norwegians. All that can easily be decided eithin 48 h. And then you can send all those Brussel bigmouth unelected muppets and their comp. in the national gov. to hell. Wheter it works or not, no problem, as I understood the SNB, they want a weak Swissie.....

Mon, 07/30/2012 - 08:50 | 2661902 hbkshivamgoel
hbkshivamgoel's picture

I did not understand how SNB made profit in Q2 buying Euro since it depreciated a lot( 1.33 to 1.23) in that period..can someone explain please..

Mon, 07/30/2012 - 08:54 | 2661905 LULZBank
LULZBank's picture

This time, Credit Suisse will get fucked.

Mon, 07/30/2012 - 08:55 | 2661912 SheepDog-One
SheepDog-One's picture

All is well, we just need moar free monies to save the day.

Mon, 07/30/2012 - 08:57 | 2661916 EmileLargo
EmileLargo's picture

Swiss Base money is up SIX FOLD since August 2011. If they cannot sell the EURs to soak the excess CHFs back, you get rampant inflation in Switzerland at some point in the future. So much for a "safe haven currency."

Paper money and safe haven are a contradiction in terms.

Mon, 07/30/2012 - 09:13 | 2661946 Tao 4 the Show
Tao 4 the Show's picture

The buyers of the Swiss francs reside mostly outside of Switzerland. Not much chance they will want to spend the francs inside Switzerland unless they want to buy gold. A bit of price inflation in gold wouldn't bother many people besides the central bankers of the world and those trying to accumulate metals.

Mon, 07/30/2012 - 09:20 | 2661965 EmileLargo
EmileLargo's picture

Once the Euro blows up and eventually things "stabilise" in Europe (which they will after the catastrophe), the CHFs will find their way back into the financial system and, ultimately, back to Switzerland, which will raise Swiss prices. The fact that the current buyers are not Swiss nationals doesn't change that. Money once printed and released can go anywhere the bankers have no control over it.

Mon, 07/30/2012 - 09:00 | 2661927 eddiebe
eddiebe's picture

Hey SNB, buy gold.

Mon, 07/30/2012 - 09:05 | 2661934 fredquimby
fredquimby's picture

So much for a "safe haven currency."

Exactly what the SNB want everyone to say :)

Mon, 07/30/2012 - 09:05 | 2661935 Tao 4 the Show
Tao 4 the Show's picture

Buying/ Selling large amounts of anything positions one well for "making" a profit - that is, positioning before you move the market with your purchases. Who knows what the SNB is doing, but itwould be relatively easy to profit.

Mon, 07/30/2012 - 09:10 | 2661942 Trader47
Trader47's picture

This is what  should happen to Greedy Bankers/Investment companies

Mon, 07/30/2012 - 09:31 | 2661990 Let The Wurlitz...
Let The Wurlitzer Play's picture

Its fun to watch the technocrats battle it out in public.  Its like the ultimate video game, life, death and global wealth all on the line.

Mon, 07/30/2012 - 09:43 | 2662012 rottor
rottor's picture

during the past 5 years Swiss GDP grew by 6%, and Swiss M3 grew by 28% (lower aggregates rose more, M0 obviously the most) you can watch it here: will it result in an inflation or currency depreciation (or both) ?

Mon, 07/30/2012 - 09:48 | 2662022 Hedgetard55
Hedgetard55's picture

Doesn't selling the euros you just bought to keep their price up negate the effect of buying?

Mon, 07/30/2012 - 09:51 | 2662030 Ted Baker
Ted Baker's picture


Mon, 07/30/2012 - 12:07 | 2662415 Bicycle Repairman
Bicycle Repairman's picture

The SNB is still the most conservative bank and the canary in the coal mine.  When they run, it is your final warning.

Mon, 07/30/2012 - 14:11 | 2662909 ATG
ATG's picture

EUD often leads SPX. The Swiss, although they violated Banking Privacy and rejected 40% Gold Backing in 2000 to gain access to Western Markets, still seem to know something about value. Big4 accumulating EUDs also, even though targeting 116, with most people short:

Tue, 07/31/2012 - 03:40 | 2664286 Peter K
Peter K's picture

59.7 is the number :)

Do NOT follow this link or you will be banned from the site!