US Treasury adds the Swiss to its FX “naughty list” – Westpac

Sean Callow, Research Analyst at Westpac, notes that the US Treasury’s semi-annual FX report again found no major trading partner was a currency manipulator, though there are six names on the watch list: China, Japan, Korea, Taiwan, Germany and now Switzerland.

Key Quotes

“There seems little chance that anyone will be designated a manipulator in the April 2017 report either, as intervention is mostly resisting a rising USD. The only wild card would be a President Trump.

The US Treasury’s semi-annual FX report was released with little fanfare on Friday. Once again, no major trading partner (MTP) was found to have been a currency manipulator under the terms of the relevant legislation. But there was an addition to the “Monitoring List” of economies that have met 2 of the 3 criteria of concern. Switzerland joined the April list of China, Japan, Korea, Taiwan and Germany. Switzerland joined the list because it replaced Brazil as an MTP.

There are only 12 MTPs in the Treasury’s judgement, meaning that half of them have ticked 2 of the 3 boxes of concern. These are:

(1) a bilateral trade surplus with the US of at least $20bn

(2) a current account surplus exceeding 3% of GDP and

(3) conducting persistent, one-sided FX intervention, totalling >2% of GDP over 12 months.

The MTPs on the list obviously all have either a hefty trade surplus with the US or current account surplus or both, but in the case of China, Japan, Korea and Germany, they had not intervened to weaken their currencies persistently. Taiwan and Switzerland were judged to have done so but both were below the $20bn trade surplus threshold.

Treasury makes the point that large scale intervention could resume in some MTPs if risk appetite is strong enough (USD/EM weakens persistently). This has not been the case since April and indeed Treasury includes its own estimates of MTP intervention to fight currency depreciation (which doesn’t really worry the US). It claims that China "sold more than $570 billion in foreign currency assets to prevent more rapid RMB depreciation" from Aug 2015 – Aug 2016. Korea is estimated to have sold a net $24bn in FX, though this is a "shift from several years of asymmetric intervention to resist appreciation".

Once again, Treasury calls for greater clarity in published data on FX transactions and reserve holdings for several MTPs. It also frowns at apparent jawboning even when not backed by actual intervention, notably by Japan. Treasury declares USD/JPY to have been “functioning smoothly” i.e. they see no case for intervention. Of the MTPs discussed, Taiwan probably comes in for the strongest criticism, but with a surplus with the US of “only” $13.6bn, it does not meet the third criterion.

The April 2017 report is likely to be similar to this one and so is the official response: a firm “no comment” from Japanese officials and silences elsewhere. Still, it is always a good read, including the bespoke estimates of intervention by MTPs. Perhaps the only risk of a major change in the report next year is if it is under a President Trump. Then we would surely see the return of the FX manipulator label, amid a broad increase in international trade tensions.”

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