by George Dorgan
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The main task of a central bank occupied with QEE (quantitative easing or exchange intervention) is to obtain higher gains on seigniorage than it loses with its “ever appreciating” currency. Otherwise its equity capital would be absorbed. In the first quarter of 2014, the Swiss National Bank (SNB) was unable to accomplish this task:
The seigniorage effect yielded 1.7% annualized thanks to interest and dividend income but the FX rate losses were 2% annualized.
The Swiss National Bank (SNB) reports a profit of CHF 4.4 billion for the first quarter of 2014. The profit on the foreign currency positions amounted to CHF 1.7 billion. A valuation gain of CHF 2.6 billion was recorded on gold holdings. (source SNB)
Winning Positions are the ones that lost in 2013
- P/L for gold: 2.6 bln. CHF after a loss of -15.2 bln. in 2013
- Valuations of government bond holdings: 2.3 bln. CHF
Losing Positions are:
- According to the release “Exchange rate-related losses amounted to CHF 2.7 billion in all”, this is an 0.5% on the 495 bln. balance sheet or a 2% annualized loss. We look at the change in FX rates in detail:
- USD, 27% of the portfolio, at 0.8844 in Q1 after 0.8873 at the end of 2013
- JPY, 8%, at 116.70 in Q1 after 118.23 at the end of 2013 –> a loss of around 0.5 bln.
- EUR, 47%, at 1.2182 after 1.2252 in Q4/2013. –> This is the biggest losing position in Q1 with a 1.4 bln loss
- GBP, 7%, at 1.4739 after 1.4773 in Q4/2013
- CAD, 4%, at 0.8001 after 0.8336 in Q4/2013 –> another loss of 0.8 bln.
The sentence from the official release “Exchange rate gains on the Japanese yen did not offset the losses recorded on other investment currencies, particularly on the euro, the US dollar and the Canadian dollar.” is rubbish. Yes, in 2013 the yen lost the most, but not in Q1/2014.
Seigniorage: 2.1 bln. compared to a 495 bln. balance sheet gives a 0.42% yield in this quarter, or a 1.7% yearly yield. This implies that the SNB will be able to afford a EUR/CHF of 1.10, a depreciation of 10%, in roughly six years.
There are two scenarios when this depreciation to 1.10 may happen
- Rising US and euro zone inflation without major improvements in the labor market. More details here.
- A Swiss boom and further pressure on the SNB as for real estate prices that require a rate hike. More details on the Swiss boom here.
The third scenario is the above mentioned fight between seigniorage income and FX rate losses. Typical QEE nations like Singapore are constrained to let their currency appreciate over time against inflationary pressures. We still need to mention that gains on equity prices are not included. Still one needs to examine if current equity valuations reflect economic reality or more the possibly only temporary QE effect.
In 2012 Thomas Jordan rejected demands by the people’s party politician Kaufmann to create a sovereign wealth fund, a method used by other QEE countries like for example Singapore. Possibly Jordan thought that Switzerland were no QEE country, but a safe-haven like Japan, a country nearly without immigration and with a trade deficit, in short the opposite of Switzerland.
Read also:
Will SNB FX Investments Yield Enough Until U.S. Inflation Starts?
What Ernst Baltensperger Got Wrong: Why SNB Losses Might Not Be Recovered By Income on Reserves
SNB has Won the Risk Aversion Battle, When Will the Inflation Battle Start?
Why the SNB will not Imitate Hong Kong, but Potentially Singapore
For comparison, the reader can obtain the results for 2013 on the second page, or via the page navigation below.
