Is Switzerland the New China?

By: Jane Tindall
Jane Tindall
I've worked within the banking & financial regulation industry for over 10 years. Now, I report on these sectors… read more.
on Aug 8, 2012

In its effort to put the brakes on the franc’s continued strengthening against the major word currencies, Switzerland has been accumulating foreign exchange reserves so quickly in recent weeks that it has been labelled by currency analysts as “the new China”, the Financial Times reported on July 31.

As the Eurozone crisis worsened, in May and June the Swiss National Bank (SNB) was forced to buy tens of billions of euros to keep the franc from gaining value quickly in the face of strong demand for a currency haven in Europe, with the franc seemingly having become that choice by default. But the cost of defending the franc is becoming apparent as the central bank is now struggling to rebalance its assets. The SNB, however, said is ready to buy as many euros as necessary to keep the franc at SFr1.20 against the single currency and protect the country’s exporters.

!m[](/uploads/story/245/thumbs/pic1_inline.png)According to estimates, the SNB is buying about SFr3 billion (£2 billion) a day in euros. Due to this rapid rate of accumulation of the single currency, Switzerland now has SFr365 billion (£240 billion) worth of foreign exchange, making it the world’s sixth biggest holder of reserves after China, Japan, Saudi Arabia, Russia and Taiwan. Talking in percentages, the proportion of the country’s reserves held in euros has risen from 51 per cent at the end of April to 60 per cent by June, or by 40 per cent this year.

Elsa Lignos, foreign currency analyst at RBC Capital Markets, pointed out that if the Swiss bank carries on accumulating euros at this rapid rate, in four years its foreign currency reserves will be higher than those of China, which currently has the largest forex stockpile in the world at $3.24 trillion (£2.07 trillion). Independently, Citigroup’s head of foreign exchange strategy, Steven Englander said “Switzerland is the new incipient China.”

Commenting on the recent comparison between Switzerland and China, Kit Juckes, foreign currency analyst at Société Générale, said for the FT that there are similarities and differences between the two countries. What is in common is mainly the need to rebalance their assets: “They have to recycle the reserves into assets of some kind.” Mr Juckes also added that currently “the picture is one of a central bank that’s not coping with how much money is coming in.”

According to many analysts, the SNB is struggling to rebalance its assets. The Swiss bank’s half-year results, released on July 31, also indicated this difficulty. Apparently, Switzerland is buying euros more quickly than it could exchange them for other currencies. The recently-released figures also showed a drop in the maturity of the SNB’s bond holdings from four years to 2.8 years. Analysts believe that this is indicating the Swiss bank’s shorter-term positions, which it is taking as it does not know how long it would continue accumulating euros at the current rate.
For now, however, the impressive accumulation of the single currency is making the SNB a huge force in the foreign exchange markets as the bank tries to sell its euros and rebalance its assets, a process that many forex traders are trying to predict. According to analysts this process is also triggering some unusual moves in the currency markets. Major currencies, including the Swedish krona and the Australian dollar are believed to be rising on the back of the SNB’s monetary strategy. Recently, the Swedish krona has hit a 12-year high against the euro, while the Australian dollar is also at record highs against the single currency.

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