The Daily Update - Renminbi Weakness or US Dollar Strength?

This week the US Department of the Treasury issued its semi-annual report to Congress on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States. Under The Omnibus Trade and Competitiveness Act of 1988 the Treasury Secretary must ‘consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade.’ Plus, under The Trade Facilitation and Trade Enforcement Act of 2015 the Treasury Secretary must ‘monitor the macroeconomic and currency policies of major trading partners and engage in enhanced analysis of those partners if they trigger certain objective criteria that provide insight into possibly unfair currency practices’.

Under the 2015 Act the Treasury focuses on 3 criteria and thresholds: First, ‘a significant bilateral trade surplus is one that is at $20 billion’; Second, ‘a material current account surplus is one that is at least 3 percent of gross domestic product’; and third, ‘persistent, one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly and total at least 2 percent of an economy’s GDP over a 12-month period’.

In the latest report, the US Treasury named China, Japan, Korea, India, Germany and Switzerland as trading partners whose currency practices require monitoring but refrained from naming any major trading partner as a currency manipulator. The Treasury found that no major trading partner met all 3 of their criteria. Unsurprisingly, despite it only meeting one of the criteria (a significant bilateral trade surplus) the spotlight remained on China. The report noted it ‘constitutes a disproportionate share of the overall U.S. trade deficit’ and ‘As a further measure, this Administration will add and retain on the Monitoring List any major trading partner that accounts for a large and disproportionate share of the overall U.S. trade deficit even if that economy has not met two of the three criteria from the 2015 Act.’ While Treasury Secretary Mnuchin commented: ‘Of particular concern are China’s lack of currency transparency and the recent weakness in its currency. These pose major challenges to achieving fairer and more balanced trade, and we will continue to monitor and review China’s currency practices’.

While there is currently a lot of focus on the decline in the Renminbi against the dollar given the trade tensions with the US, this is against a backdrop of US dollar strength. The Chinese authorities have made it clear they do not intend to weaken the exchange rate to offset the tariffs. We view the recent weakness as temporary and exacerbated by trade tensions and slowing growth concerns; but China has a positive NFA position and buffers to counteract any such difficulties. Moreover, the increasing internationalisation of the renminbi as projects such as the Silk Road progress, China’s financial markets open up, more trade is denominated in renminbi and the renminbi is increasingly used as a reserve currency remain positive medium-term drivers.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.