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 May 02, 2012 10:33 AM

(By Bruce Krasting) The 1st Q reserve numbers for the Swiss National Bank tell an interesting story. For a second quarter in a row, the foreign reserves have declined.

There is only one way that this could have happened; the SNB offloaded a portion of the EURCHF position it took on back in September of 2011 when it was forced to intervene.

A significant portion of the CHF 60B ($67B) "reverse intervention" was the result of the unwinding of large speculative short EURCHF positions by market players. (This demonstrates how big the speculative capital flows were.)

Some additional EURCHF sales by the SNB were, no doubt, accomplished when the market was betting that the SNB would raise the Peg from 1.20 to 1.30 or higher.

Officials at the SNB did everything they could to encourage speculation that the Peg might be raised. I find it amusing that while those officials were talking the EURCHF higher, they were actually selling on the side. Basically they lied. For an interesting perspective on this: Link

Just a few weeks ago a big shot at Goldman was selling the idea that the SNB would raise the Peg to 1.35. Maybe some of the SNB's"chatter" rubbed off on O'Neill.

At this point the EURCHF is truly pegged. If it goes higher, the SNB will take the opportunity to offload more of its unwanted Euros. The flip-side is also true, having reduced its reserves by 20% over six months, the SNB has tons of ammunition to fight off a speculative attack. It's as if the Swiss have joined the Euro at a fixed exchange rate.

If the political issue of actually getting married to the EU/Euro were on the ballot, the Swiss would vote 10 to 1 against it. But when it comes to creating a currency advantage, the Swiss look the other way.

If the discussion ever came up about what exchange rate the EURCHF should be permanently fixed at, it would be at a rate much closer to 1.00 then 1.20.

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