Great Graphic: Composition of SNB's Reserves

The Swiss National Bank will report the composition of its reserves as of the end of Q3 on Wednesday.  This Great Graphic comes from the SNBCHF blog, showing the composition of SNB currency reserves in Q1 and Q2.  

  

The fact that the SNB ended Q2 with a greater proportion of euro reserves (60% vs 51%) than in Q1 indicated that it was not as aggressive in diversifying the proceeds of its intervention to prevent the euro from falling through the CHF1.20 level.

Looking at the SNB's monthly figures, it appears that the valuation of its currency reserves rose by about $68 bln in Q3.  Some fraction of this increase is likely a function of the vagaries of foreign exchange prices. 

In a quarter that saw the US dollar decline against all the G10 currencies, it held up best against the Swiss franc, falling by a little less than 1%. The franc lost about 0.6% against the euro and about 2% against sterling. Less importantly, the franc lost about 0.4% against the yen and a little more than 2% against the Canadian dollar. 

The ECB's announcement of its Outright Market Transaction scheme in early September saw the euro rally to the best levels since the start of the year to approach the CHF1.22 area. It has since settled down to consolidate in the CHF1.21 area. The SNB's intervention and Japanese intervention in the second half of last year, while Chinese reserve accumulation has slowed considerably meant that for the first time in more than a decade, developed countries reserves have grown faster than developing countries reserve accumulation.

The SNB's euro buying intervention distorts the overall picture, but it does appear that developing countries pared their euro holdings in Q2 so that the single currency accounted for 25.8% of their reserves, down from 27.1% in Q1. Owing nearly solely to the SNB, developed countries euro holdings increased to 24.5% from 23%, making some adjustment for valuation and drawing from only the allocated reserves, which notable does not include China (or Taiwan), among others.

There had been some speculation in the market that the SNB had been recycling its euro reserves into the French bond market. There is a logic to it beyond the small pickup in yield. The upward pressure on the franc is believed to emanating from the euro area itself, as savings seeking the security of Switzerland. 

If the SNB were to simply recycle those euros into bunds it would be adding yet another force pushing down German yields relative to the periphery. Although the conservative SNB holds around 10% of its reserves in equities and has emerging market exposure as well, putting its reserves into the periphery may be too much for it and France offers a reasonable alternative.