October 4 (Reuters) – If the Swiss central bank were to reduce its foreign exchange reserves by a small fraction, it could have a big impact on currency markets – and there is evidence to suggest this may have happened already.
Foreign exchange reserves, which approached one trillion Swiss francs at the end of last year, have fallen. Part of this is due to big changes for the currencies that reserves are made up of, but not all of them.
The dollar, which constitutes 38% of Swiss foreign exchange reserves, has exploded in value, which should offset the changes resulting from the sharp declines in the pound sterling and the yen, which together represent 14%.
Swiss reserves plunged by almost 100 billion francs between January and June and have only increased slightly since.
This is despite the likelihood that the SNB continued to intervene to support EUR/CHF during a period of high uncertainty and risk-averse trading behavior that fueled demand for the Swiss franc.
More recently there has been a record dive demand deposits, which could be partly explained by the reduction in reserves.
If the SNB were to reduce reserves by 10%, the impact would be enormous. The $33 billion gross sold against the Euro would be higher than the BOJ’s recent USD/JPY intervention, estimated at around $25 billion, which took USD/JPY from nearly 146 to 140.
Yen sales would be roughly equivalent to $7 billion and sterling sales nearly $6 billion.
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(Jeremy Boulton is a market analyst at Reuters. Opinions expressed are his own)
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