This suggests an underpinning of demand for CAD, AUD, SEK, DKK, SGD and KRW, which saw a relative outperformance of AUD and SEK over the period. These holdings are about €4 billion higher relative to the benchmark, analysts estimate. “It is not clear that an immediate acceleration of SNB buying of these currencies is due in the months ahead, but even a small amount of buying can have a relatively large impact given the limited liquidity for these markets,” wrote Citi FX strategists Todd Elmer and Josh O’Byrne.
This constitutes the first currency breakdown since the SNB started increasing reserves at a pace of 20% month on month in May. Markets were watching the number closely to determine how much new reserve money has been recycled, so as to estimate how much more euro selling is to come.
According to market estimates, the SNB has conducted approximately a third of its reserve rebalancing. That would translate into about €18 billion-worth of selling, which might mean they have between €30 billion and €34 billion left to do.
Some of that might have been recycled in July however, but what also has to be taken into consideration is that the bank is continuing to accumulate more reserves as it seeks to defend the EURCHF floor.
As the table below shows, however, the SNB is having some difficulty diversifying its reserves out of euros. Euro reserves are up to 60% from 51% as at the end of the first quarter. Citi points out that when taking into account the overall rise in reserves and changes in valuation, the SNB was able to diversify only about 25% of the euros it bought in the second quarter.
| SNB FX reserve changes Q1-Q2 |
Source: CitiFX, Bloomberg, SNB
Still some of that might be explained by the price action in the euro over the period, says UBS.
“The pace of accumulation in the second quarter has been significant and so significant
selling in EURUSD may have exacerbated price action in a currency which was already trading heavily,” wrote Geoffrey Yu in a note today.
Therefore “the SNB did not wish to be seen as disruptive and causing a vicious cycle in EUR performance, which would have made its own policy execution far harder,” Yu noted.