Monday, December 20, 2010

A Trade Against the Swiss National Bank (CHF/YEN)

From Bruce Krasting:
The Swiss National Bank has made two significant reserve management moves over the past decade that have blown up spectacularly. Now they have put on another big position. Given the past track record, a spec position against their book might be a winner. First, a bit about the past.

Starting in 2001 and ending in 2005 the SNB sold off half of their big holdings of gold. They sold a total 1,300 tonnes. Phillip Hildebrand, the current chairman of the SNB gave a speech in 2005 to the Institute for International Economics. He crowed about the success of the program. (PDF Link). This chart from that speech tells it all. The SNB sold at the dead bottom of the market. The four-year program netted them an average selling price around $350. What a disaster. The 42 million ounces of gold is now worth $44 billion more than what it was sold for.

The next blunder occurred early this year when the SNB made the terrible choice of defending the weak Euro against the strong Swiss Franc. They absorbed an additional CHF 120b in reserves in this losing battle. After spending a fortune they folded their cards and just watched the CHF appreciate even more. Today the EURCHF is at the lowest level in history. How much did this cost? In the first nine months of the year the tab came to CHF 21b ($22b). Things have gotten worse since 9/30.

My criticism with the SNB is not that they lost money. I don’t think they should have taken these steps. I doubt they would have if they had not fallen sway to political pressure. The farmers, exporters and tourist industry pushed the SNB into a corner. They reacted in a dumb way at the wrong time and now are paying a big price. I think that in an effort to gloss over their past mistakes they have now made yet another mistake.

The most recent move by the SNB was to convert a portion of their unwanted (and losing) Euro holdings into Japanese Yen. In the 3rd Q they made a number of reserve shifts to mask their exposure to the Euro. They reduced their Euro holdings from CHF 120b to 90B. A good chunk of that reserve diversification went into the Yen. This chart looks at the quarterly changes in holdings. You can see that the Yen assets increase by 150% and now total 10% of all reserves....MORE
For the record the worst trade ever was Gordon Brown's sale of half of England's gold reserves at the bottom of  a twenty year bear market for realized prices between $255.75 and $296.50, 1999-2002.