Swiss National Bank Q3 2020: $128 Billion in US Equities

By: Robert Aro

Will Switzerland become the next country to be labeled a currency manipulator?

The definition of “currency manipulator” has been laid out by the Treasury and explained by the Council on Foreign Relations (CFR) below. It requires the following three criteria to be met:

  • a trade surplus with the United States of more than $20 billion
  • a current account surplus (the current account is a broader measure of trade that includes foreign debt payments and investment income but is usually close to a country’s overall trade balance) of more than 2 percent of the economy’s gross domestic product (GDP)
  • intervention—government purchases of dollars in the foreign exchange market—of over 2 percent of the economy’s GDP, with purchases of foreign exchange in six of the last twelve months

A driving factor behind this designation is to crack down on those nations that supposedly get an unfair trade advantage through currency devaluation, the belief being that a weaker currency is good for exports.

The Swiss National Bank’s (SNB) Q&A on asset management states:

In order to implement its monetary policy, the SNB carries out monetary policy operations which affect the size and composition of its balance sheet. The assets side of the SNB’s balance sheet is primarily composed of the currency reserves….The foreign exchange reserves consist of bonds, equities and investments at central banks.

On Friday, Reuters said that the US will report on currency manipulation in the coming weeks. Switzerland could now be classified as a currency manipulator due to finally meeting the “2% of GDP of net FX purchases” requirement. If so, it could face retaliatory intervention by the US such as import tariffs, as China experienced when it was labeled a currency manipulator. Per the news release, the SNB defends itself citing:

Officials have said in the past that interventions are aimed at limiting the appreciation of an “overvalued” currency, rather than at deliberate devaluation to help exporters.

The Swiss steadfastly maintain that their currency intervention has nothing to do with trying to get an unfair trade advantage. Rather, it’s to help manage the exchange rate of the Swiss franc as part of their monetary policies. Of course, what the “correct” value of the franc should be and what the purpose of wanting to devalue a currency, if not for a trade advantage, remains unclear.

Even if the SNB is not trying to devalue the currency for an export advantage, but because they truly believe the currency is overvalued, they might try to hold the franc down this way, also explained by the CFR:

They do this by selling their own currencies and purchasing dollar bonds or other foreign assets. The result is large holdings of foreign assets in central banks or sovereign wealth funds (SWFs). 

The issue becomes what to do with all those dollars. Perhaps the SNB can engage in various currency trades or simply hold US dollars. But why hold billions of dollars at today’s low rates when a central bank could put that money to work?

In the case of Switzerland’s central bank, their latest quarterly 13F filing showed a market value of nearly $128 billion in US equities, an increase of $10 billion from the previous quarter. Their largest holding remains Apple, in which the foreign central bank owns an astounding $7.8 billion worth of stock! Having one of the largest portfolios on the planet is an impressive feat. And while having this large an equity holding doesn’t qualify the SNB as a currency manipulator, are its assets not the result of a currency manipulation?

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