The SNB’s Success Story

Earlier this week, the Swiss National Bank (SNB) revealed its foreign reserve composition for Q3 2012. It showed that the central bank let go a big chunk of its euro holdings in order to diversify to other major currencies.

Prior to the third quarter, the euro’s share of the SNB’s reserves was a whopping 60%. During Q3, however, the share dropped significantly to 48%. In contrast, the U.S. dollar’s share grew from 22% to 28%. Meanwhile, the British pound’s contribution jumped to 7% from 3%. As for the “other” category that included currencies like the Australian dollar, Swedish krona, Danish krona, Singaporean dollar, and Korean won, the composition remained unchanged at 4%.

SNB Forex Reserves Composition

It seems that the dollar and the pound were the primary targets of the central bank due to their liquidity. The pound was also favored because investors considered it as a hedge versus the ongoing euro zone debt crisis.

Since the start of the year, the SNB’s foreign exchange reserves have grown 70%. The central bank’s reserves now stand at 429.9 billion CHF, or 461.8 billion USD. Just to put how big that amount is in perspective, 429.9 billion CHF translates to about three-fourths of Switzerland’s entire GDP. That’s huge!

Why has the SNB been hoarding so much foreign currencies? If you recall, about a year ago, the SNB decided to peg the Swiss franc to the euro at 1.2000. To make sure that the Swiss franc does not appreciate to keep its exports competitive in the global market, the SNB had to buy billions of euros.

Of course, the SNB’s obvious efforts to diversify its currency reserves didn’t go unnoticed among market players. Some analysts are already thinking if we should follow the central bank’s footsteps and lighten our euro holdings.

But with Draghi and his gang still getting a feel of the effects of the their OMT program, I think it will be a while before investors seriously consider dumping the euro for good.

The impact of the SNB’s monetary policy on other assets is also speculated upon. For example, a major Asia-based investment company estimates that a huge chunk of the 17 billion GBP foreign gilt purchases in the third quarter came from the SNB. Not only that, but the SNB might also be significantly easing the selling pressure on the euro just because their reserves are on “comfortable” levels already.

Last but not the least, analysts are giving thumbs up to the SNB for actually making profits amid its rebalancing efforts. If you recall, the SNB was placed on the hot seat in 2010 when it printed a record loss of 27 billion CHF after it had intervened in the currency markets to weaken the franc.

This time around the central bank had managed to earn a 16.9 billion CHF profit from January to September 2012. Word on the hood is that it gained 94 million CHF from its “franc positions” and another 6.2 billion CHF from the appreciation of its gold assets.

I don’t know about you, but it looks like the SNB’s monetary policy seems to be working well for it!