Swiss forex reserves hit record high after Dec intervention

Swiss Franc and Euro banknotes are lying on a table in a Swiss bank in Bern. The Swiss National Bank held 495.104bn Swiss francs ($490bn) in foreign currency at the end of December, compared with 462.669bn francs in November. The rise in December is the sharpest jump since summer 2012, the height of the euro crisis.Reuters/Zurich/LondonSwitzerland’s foreign exchange reserves rose to a record high last month, data showed yesterday, as the central bank stepped up intervention in the currency market after a two-year absence to keep a lid on the red-hot franc. The figures come as the eurozone grapples with talk of a possible exit by Greece and the euro slid to a nine-year low against the dollar, factors which are likely to test the Swiss central bank’s resolve to defend a three-year old cap on the franc against the euro. The SNB held 495.104bn Swiss francs ($490bn) in foreign currency at the end of December, compared with 462.669bn francs in November. The rise in December is the sharpest jump since summer 2012, the height of the euro crisis. The reserves — which have reached a size equivalent to around three-quarters of the Swiss economy — are the first indication of the depth of the central bank’s intervention last month, when a rapidly weakening Russian rouble pushed the safe-haven franc up further and prompted the SNB to act. The SNB also said in December it would start charging banks for deposits in francs for the first time since the 1970s, hoping to stem a flight into the country. But with the franc climbing against the euro towards the 1.20 francs per euro cap — it was last trading at 1.2010 francs — pressure is building on the SNB. Those expectations will get a boost if the European Central Bank launches a full-fledged government bond buying programme, or quantitative easing (QE). “A QE announcement by the ECB on January 22 would continue to move interest rate differentials in favour of the Swiss franc,” said Michael Sneyd, currency strategist at BNP Paribas, adding the franc could see more upside pressure and threaten the cap. Expectations that the ECB will take action when it meets on January 22 grew after data showed eurozone prices falling for the first time since 2009. Analysts expect SNB’s reserve accumulation to continue. Most don’t expect the 1.20 franc per euro cap to be breached due to SNB’s intervention, but more action like deeper negative interest rates could not be ruled out. Jefferies analyst Susanne Galler estimated that the SNB bought around €24bn in December to defend the peg. Of that, the SNB would have recycled €7bn into other currencies to rebalance its reserve portfolio. At the end of the third quarter, the SNB held nearly 45% of its reserves in euros and 29% in US dollars assets. Bond analysts expect it continue investing a bulk of its reserves in euros. “I expect the SNB to buy euro denominated assets to protect the 1.20 level. This is one reason why the upside in Bund yields is limited,” said Emile Cardon, an economist at Rabobank. The SNB disclosed the reserves two days before it reports preliminary earnings for 2014, which UBS has estimated at between 36bn and 38bn Swiss francs, following a loss in the previous year. The SNB’s profits, which the central bank traditionally pays out in part to federal and cantonal governments, have been a delicate subject politically since last year’s absence of payouts.