There is a “new China” active in the currency markets, according to analysts, as Switzerland’s battle to weaken the franc inflates its stockpile of foreign currency reserves.
The Swiss National Bank was forced to buy tens of billions of euros in May and June after the eurozone crisis worsened, creating strong haven demand for the franc and threatening the ceiling the central bank set for its currency last September. The SNB is prepared to buy as many euros as it takes to hold the franc at SFr1.20 against the euro to protect the country’s exporters.
As a result, Switzerland’s foreign currency reserves have leapt more than 40 percent this year to SFr 365 billion ($375 billion), propelling it to the sixth largest holder of foreign exchange in the world from ninth last year, behind China, Japan, Saudi Arabia, Russia and Taiwan.
The proportion of euros held by the SNB also ballooned in the second quarter of the year, rising from 51 percent to 60 percent. Foreign currency analysts said the bank was buying SFr3 billion worth of euros a day to defend the Swiss franc, with serious knock-on effects for the global forex market.
“Switzerland is the new incipient China,” said Steven Englander, Citigroup’s head of foreign exchange strategy.
The SNB is believed to be partly responsible for recent moves in major currencies including the Australian dollar and the Swedish krona as it seeks to offload some of its euros.
But that has consequences for other central banks, whose own currencies are rising in value as Switzerland sells its euros back to the market. The Swedish krona has hit a 12-year high against the euro in recent days, while the Australian dollar is at record highs against the single currency.
“Sweden will need to set monetary policy now with the SNB in mind,” said Geoffrey Yu, foreign currency analyst at UBS.
Analysts also warned that SNB’s half-year results, released on Tuesday, indicated that the central bank was struggling to rebalance its holdings as it appeared to be buying euros more quickly than it could exchange them for other currencies.
Figures showed a drop in the maturity of the SNB’s bond holdings from four years to 2.8 years, which analysts said indicated that the bank was taking shorter term positions because it did not know how long it would carry on accumulating euros at the current rate.
“The picture is one of a central bank that’s not coping with how much money is coming in,” said Kit Juckes, foreign currency analyst at Société Générale. The SNB declined to comment on its foreign exchange management strategy.