Some Interesting Developments by SNB and Norway's SWF

The Swiss National Bank reported its reserve figures yesterday and the increase in its sterling holdings are notable and may help explain the its relative strength, despite data a soft real sector reports, culminating in the news last week that, defying expectations, the UK economy contracted in Q1, the second consecutive quarter that the British economy shrank.

Separately, Norway's sovereign wealth fund, the Government Pension Fund Global, indicated it has sold off its Irish and Portuguese bond holdings, pared its Spanish and Italian holdings and increased its exposure to Mexico, Brazil and Indian bonds.

Some commentators have suggested M&A flows into the UK explain the sterling's performance. However, in our experience, M&A flows are more complicated. First, often times businesses will borrow the target currency rather than buy it. This allows it to take on a liability in the same currency in which is acquiring an asset.

Second, there is a large time lag between the announcement of a deal and its completion. Observers tend to seem it as a contemporaneous relationship as if very day of the announcement, the transaction takes place. Some times corporations may buy some protection for contingency risk (often through the options market) before the announcement is made.

The Swiss National Bank's reserve figures offer an alternative explanation for some of sterling's strength. Its sterling holdings almost doubled in Q1 to GBP14.5 from GBP7.5 bln at the end of Q4 11. It turns out to be almost GBP600 mln a week. The SNB's dollar holdings also rose by about $7 bln to almost $71 bln. These purchases are function of the SNB diversification of its euro reserves, acquired in capping the Swiss franc. The euro holdings fell by about 17 bln in Q1 to 103 bln.

Norway's sovereign wealth fund, which is often seen as a model for others, indicated earlier today that it has continued to reduce its southern European bond holdings, which it has been doing for two years. It no longer has Irish and Portuguese bonds. It reduced its Italian bond holdings by about 20% to NOK26.6 bln. It reduced its Spanish bond holdings by about 14% to NOK15.6 bln.

Euro-denominated bond holdings now account for 39% at the end of Q1, down from 43% at the end of 2011. Norway replaced its reduced European holdings, with Mexican, Brazilian and Indian bonds.

Its portfolio allocation may be of interest to fund managers. At the end of March, 60.7 % of the fund was allocated to equities, 39% in bonds and 0.3% in real estate. Reports suggest its biggest equity holding was Royal Dutch Shell and its largest bond holdings were Treasuries, followed by UK gilts and French bonds.