The Swiss National Bank is sitting on a pile of euros, and the size of that pile says a lot about where the euro is headed.
It hasn't been easy defending the level of the Swiss franc. just ask the Swiss National Bank, which has been selling francs and buying euros at a furious pace to keep the Swiss currency in check. Swiss central bank reserves increased by about half in the second quarter, and "are now close to 65% of Swiss GDP, a very large number," says Steven Englander, global head of G10 FX strategy for Citigroup . "The assumption is that in the first instance almost all of the initial purchases were of EUR (to support the 1.20 peg)."
The question now is, what are the Swiss doing with all those euros? Prudent financial management says the SNB has to rebalance its holdings, but the recent swings in the euro's value make that tricky at best. So if they haven't yet managed to rebalance all they want, expect meaningful selling pressure on the euro in the weeks ahead, Englander says.
"If the EUR share runs above 55% or worse 60%, it would mean that the SNB has had to hang on to a large chunk of their euros," Englander wrote in a note to clients. "Investors will see greater risk of ultimate capital loss if the peg should break and greater risk of desperation selling of EUR down the road."
That can't help euro holders, given the many other uncertainties the currency faces. But at least this one is short term. The Swiss National Bank is due to release its first half results on Tuesday morning Swiss time.
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