Get Ready For A Complete Rewrite Of The ‘Currency Manipulation’ Rules

Last week, Steve Mnuchin elected not to slap China with the derisive “currency manipulator” label in Treasury’s semiannual report, a decision that, for now anyway, averts a further escalation in the trade war between Washington and Beijing.

To be sure, the report had some strong words for China with regard to the yuan, but as detailed here extensively over the past several months, a good bit of RMB weakness from June to early August was attributable not to active efforts on the part of the PBoC to engineer depreciation, but rather to the growing monetary policy divergence between the U.S. and China and to the divergent trajectories of the two countries’ economies.

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Treasury Declines To Name China The Currency Manipulator That Trump Swears They Are

Of course Donald Trump has repeatedly accused the Chinese of currency manipulation and the President is the opposite of shy when it comes to suggesting that Beijing should indeed be branded with the “manipulator” label.

Yuan weakness and an assumed effort to get out ahead of the tariffs contributed to China logging two consecutive record surpluses with the U.S. in August and September.



Friday’s economic data out of China showed the Chinese economy decelerating further in Q3, although a retail sales beat suggests domestic consumption is holding up ok. It is likely that as the tariffs bite and the Trump administration ratchets up the pressure, the yuan will come under more pressure, setting the stage for the President to lean harder on the “manipulation” narrative going forward.

As ever, the irony is that Trump has made a habit of explicitly imploring the Fed to adopt dovish monetary policy in part to relieve some of the upward pressure on the dollar. He’s also attempted to jawbone the currency lower via Twitter and rumors were flying in August that he might ultimately resort to outright intervention to stem dollar strength. In other words: He’s trying to manipulate America’s currency.

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Presenting, The Dollar Intervention Delusion

Well, on Sunday, in an interview from Jerusalem (the first stop on a whirlwind tour of the Mideast), Mnuchin said he’s open to changing the definition of “manipulator” in the interest of applying more pressure on the Chinese amid the trade war.

“The move could give Trump the chance to officially brand China a foreign exchange-rate manipulator as he seeks leverage to redefine trade terms between the world’s largest economies”, Bloomberg reports, adding that “one method Mnuchin would consider: Using a 1988 trade act with a broad definition of currency manipulation to designate a country a manipulator, even if the label isn’t warranted by specific tests under a 2015 law.”

It’s also possible the Trump administration could just change the three-pronged test Treasury uses to make its determinations.

Mnuchin on Sunday conceded that part of the issue when it comes to dollar strength is the administration’s own fiscal policies, which are not only leading to divergent growth outcomes with the rest of the world, but also prompting the Fed lean more hawkish than they otherwise might. Trump’s protectionist trade stance is exacerbating this by creating a situation where Jerome Powell has to stay vigilant in case tariff-related price pressures begin to build. Further, the trade war is undermining expectations for global growth, which drives another wedge between the U.S. and the rest of the world, thus precipitating still more dollar strength. All of this is part and parcel of what we’ve variously described as Trump’s “dollar insanity loop“.

Trump’s July tweets suggest he expects other countries to effectively undermine their own economies in the interest of helping the U.S. “win” the trade war.

“China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day taking away our big competitive edge”, Trump said, adding that “as usual, [it’s] not a level playing field.”

Note how absurd this is. Trump is undermining expectations for global growth by slapping tariffs on everyone, turbocharging the U.S. economy with late-cycle stimulus (thus backing the Fed into a hawkish corner), then turning around and demanding that other countries raise rates in the face of economic headwinds.

BofAML addresses all of this in a note dated Friday and while they’re polite about it, the incredulity is palpable.

“In our view, we are in the process of seeing a rewrite of what it means to be a ‘currency manipulator'”, the bank writes, before fleshing out the “new” standard as follows:

Under the new metric, any time a country eases monetary policy it can be considered currency manipulation because one of the side effects is a weaker currency. More broadly, just as trade deficits are now considered prima facie evidence of “unfair” trade practices, a strong dollar can be equated with “currency manipulation.”

Again, this is absurd. And everybody knows it. “Taken literally, the new policy creates a catch-22 for non-US central banks [as] any country with a weak currency would be expected to tighten monetary policy even if the economy is weakening (as in China today) or inflation is persistently below target (as in Europe)”, BofAML goes on to say, adding that “when a country faces a negative growth shock it tends to have both weak growth and a weak currency [but] under the new rules, the government would be expected to raise rates to stop the currency weakness”.

Trump, apparently, will demand that other countries adopt pro-cyclical monetary policy or, more to the point, deliberately undermine their own economies at the worst possible time in the interest of helping the U.S. trade balance.

This, BofAML says, could be the Trump administration’s new policy:

The upshot is that a shift in the definition of “currency manipulation” could be a first step towards US intervention to weaken the dollar. The argument would be: just as tariffs are not protectionism, but a way to level the playing field, currency intervention would not be manipulation, but a way to level the playing field.

So, Trump would be allowed to intervene directly in order to drive the dollar lower, but other countries would be expected to deep-six their own economies by hiking rates into downturns just to pacify the man in the Oval Office.

Welcome to the Twilight Zone.


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