Mild mannered Switzerland is putting downward pressure on the common currency.
With all the tumult in the euro zone, the Swiss have been laboring to keep their safe-haven franc from reaching the stratosphere - or at least keeping it from levels that would make exporting impossible. To do so, they've been buying euros and selling Swiss francs, and for many months that was providing some nice euro support.
Nice, right? The problem is that the Swiss National Bank, like other central banks, tries to maintain a certain balance among its reserve currencies. So when the Swiss do intervene with heavy purchases of euros, sooner or later they start selling euros to rebalance their reserves.
"Swiss and US TICs data" on cross-border capital flows "supports the notion that the SNB can and does rebalance back to very close to benchmark within a couple of months of very large scale intervention," says Alan Ruskin, global head of G-10 foreign exchange strategy at Deutsche Bank. "We are still in the middle of a vicious cycle whereby EUR ‘diversification’ sales by the SNB are having a broad negative impact on EUR sentiment."
How far do the Swiss go to rebalance? "They buy EUR but thereafter they sell roughly half the EURs they have just bought, sometimes buying currencies that will move a lot, leaving the euro looking very weak on key crosses," Ruskin told me. "That is the vicious cycle that they are in."
And lest you think that holdings by the Swiss don't amount to much, Ruskin says that "the size of the EUR assets on the SNB balance sheet as a share of GDP are larger than the total balance sheet of most developed country Central Banks relative to GDP."
These waves of intervening and rebalancing come and go, but Ruskin says that the rebalancing tends to follow intervention fairly quickly. Swiss reserves jumped in May, suggesting they intervened then, and he says past patterns suggest that "the SNB can fully diversify back very close to benchmark within a couple of months."
Just fasten your seatbelts while they do it, OK?
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