Thursday, August 11, 2011

Looking at the Swiss National Bank's Balance Sheet

The Swiss Franc (CHF) is trading sharply lower today against the dollar on news that the Swiss National Bank is considering a "temporary" peg of the currency against the Euro.  However, the move shouldn't be too surprising to the market as the SNB has been trying to manage the CHF/EUR exchange rate aggressively for the past several years.

These aggressive actions have had a significant effect on the SNB's balance sheet and, by extension, the assets which back the CHF.  Today, a large portion of the assets which back the CHF are EUR denominated, indicating that a "soft" peg has been in effect for some time.  (After all, a currency peg is executed by a central bank standing willing to purchase foreign currency in exchange for local at a fixed rate.)

Since 2009, the SNB has been heavily buying EUR in order to manage the exchange rate.  Foreign currency reserves now represent nearly 80% of the SNB's balance sheet:

The bulk of the buying has been of EUR which now represents 56% of the currency reserves, or 42% of the aggregate balance sheet.

During the Eurozone crisis, the CHF has benefitted from a flight to safety trade.  However, a careful inspection of what the central bank holds against CHF suggests that perhaps investors are simply moving assets from the left hand to the right.  If 42% of the "safe" asset is backed by the "risky" asset, then how safe can that asset really be?

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