While the US Treasury’s semi-annual report on the foreign-exchange policies of major U.S. trading partners has traditionally been, pardon the pun, a paper tiger, as the US has not named a single country as a currency manipulator since it did so to China in 1994, and it didn’t go so far as to blame any country as an outright manipulator in the just released April edition, there was a new addition to the latest report.
In an inaugural “monitoring list”, the US put five economies including China, Japan and Germany (as well as South Korea and Taiwan) on a new currency watch list, saying that their foreign-exchange practices bear close monitoring to gauge if they provide an unfair trade advantage over America.
This is what it said:
In determining the appropriate factors to assess these criteria, Treasury took a thorough approach, analyzing data spanning 15 years across dozens of economies, including all economies that have had a trade surplus with the United States during that period, and which in the aggregate represent about 80 percent of global GDP. The thresholds are relatively robust in that reasonable changes to the thresholds do not materially change the Report’s conclusions. Treasury will also continue to review the factors it uses to assess these criteria to ensure that the new reporting and monitoring tools provided under the Act meet the objective of indicating where unfair currency practices may be emerging.
Pursuant to the Act, Treasury finds that no economy currently satisfies all three criteria, however, five major trading partners of the United States met two of the three criteria for enhanced analysis. Treasury is creating a new “Monitoring List” that includes these economies: China, Japan, Korea, Taiwan, and Germany. China, Japan, Germany, and Korea are identified as a result of a material current account surplus combined with a significant bilateral trade surplus with the United States. Taiwan is identified as a result of its material current account surplus and its persistent, one-sided intervention in foreign exchange markets. Treasury will closely monitor and assess the economic trends and foreign exchange policies of these economies.
As noted above, Treasury is creating a new “Monitoring List” that cites major trading partners that have met two of the three criteria specified in the Act. In this first Report, the Monitoring List includes China, Japan, Korea, Taiwan, and Germany.
This is about as direct a threat to the 3+2 nations not to engage in major currency devaluation whether through QE, NIRP or major interest rate changes as Jack Lew could come up with, and in some ways was to be expected in the aftermath of the G-20 meeting which as we found out this week, precluded any additional QE by the BOJ.
Recall that as part of the most recent G-20 accords, which many believe is what unleashed the steep slide in the dollar, the member nations agreed to refrain from FX intervention absent “disordely markets.” It also made clear what could push a country from merely the watch list to full blown manipulator status:
While no economy met all three of the criteria, this result is a reflection, in part, of the dynamics of the global economy during the past year, in which capital outflows from emerging markets have led a number of economies to engage in foreign exchange intervention to resist further depreciation of their currency (rather than appreciation). The extent of these flows was unusually high by historical standards, which underscores the possibility that more economies may trigger these thresholds going forward.
It added that “the Administration shares strongly the objective of taking aggressive and effective actions to ensure a level playing field for our workers and companies. The President has been clear that no economy should grow its exports based on a persistently undervalued exchange rate, and Treasury has been working aggressively to address exchange rate issues bilaterally, including through the U.S.-China Strategic and Economic Dialogue, and multilaterally through the G-7, G-20, and the International Monetary Fund.”
And specifically referring to the G-20 meeting, the Treasury notes the following:
The United States has secured commitments from the G-20 member countries to move more rapidly to more marketdetermined exchange rates, avoid persistent exchange rate misalignments, refrain from competitive exchange rate devaluations, and not target exchange rates for competitive purposes. Through Treasury’s leadership, the G-7 member countries, including Japan, have publicly affirmed that their fiscal and monetary policies will be oriented toward domestic objectives using domestic instruments. Treasury has also pushed for stronger IMF surveillance of the exchange rate policy obligations of its members. The IMF now publishes an exchange rate assessment for 29 economies, and is improving its exchange rate analysis in its Article IV reports on member countries. And through U.S. leadership, the Trans-Pacific Partnership countries have adopted—for the first time in the context of a trade agreement—provisions that address unfair currency practices by explicitly adopting G-20 exchange rate commitments and by promoting transparency and accountability.
In other words, the next country that dares to engage in wholesale currency devaluation with the US’ express prior permission gets it, although it is not quite clear what “it” is (we will have more thoughts on that tomorrow).
Finally, there was no comment by the US Treasury on the biggest FX manipulator of all, the US Treasury itself which courtesy of the Fed can move the value of the Dollar higher or lower by orders of magnitude in seconds. Why? Because for now the US “reserve currency” privilege allows it to do whatever it wants, plus as a reminder, the world remains synthetically short trillions of dollars. If the US wants to punish everyone else, all it needs to do is to increase the value of the dollar by 10-15% in a short period of time, and we will again witness the same events that led to the market swoon in late 2015 and early 2016.
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