Earlier this week, the US Department of the Treasury issued its semiannual Report on the Macroeconomic and Foreign exchange Policies of Major Trading Partners of the United States. Notably, China is no longer designated a currency manipulator and has instead been moved to the monitoring list: the timing nicely coincides with the expected signing of Phase I of the US-China trade agreement later today.
US Treasury Secretary Steven T. Mnuchin commented: “China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability.” The report notes that “China has also agreed to publish relevant information related to exchange rates and external balances. Meanwhile, after depreciating as far as 7.18 RMB per U.S. dollar in early September, the RMB subsequently appreciated in October and is currently trading at about 6.93 RMB per dollar. In this context, Treasury has determined that China should no longer be designated as a currency manipulator at this time.” At the time of writing, the renminbi (CNH) is trading +1.2% YTD on a total return basis supported by positive sentiment around the trade deal and it has appreciated 5.6% from early the September 2019 weak point.
Nevertheless, the report puts 10 major trading partners of the US (China, Germany, Ireland, Italy, Japan, Korea, Malaysia, Singapore, Switzerland and Vietnam) on the monitoring list and notes that the real dollar is ~8% above its 20-year average and it is judged by the IMF to be overvalued on a real effective basis: persistent strength is likely to continue to exacerbate imbalances on the trade and current account. Thus, with some progress having been made with China, US attention is likely to turn to other countries on the list. For example, the report highlights that Germany’s current account surplus ‘remains the largest in the world in nominal dollar terms at $283 billion over the four quarters through June 2019.’ Plus, the bilateral trade imbalance with the US remains large. The report flags weakening German growth in 2018-2019 which “underscores the urgent need for Germany to cut elevated labor and value-added taxes, restore stronger purchasing power to German households, and undertake reforms to unleash robust domestic investment and consumption. This would help underpin domestically driven growth and reduce large external imbalances.”
Given the Eurozone’s large current account surplus, we would expect that trade discussions between the EU and US will also be topical this year with the EU Trade Commissioner Phil Hogan due to meet Robert Lighthizer, the US Trade Representative on Thursday. Clearly, there are a lot of issues that need to be addressed with the US threatening retaliatory tariffs on $2.4bn of French imports in response to a digital services tax. Plus, a tit-for-tat tariff dispute over subsidies to Airbus and Boeing is ongoing while US tariffs on European car imports remains a threat as there seems to have been little progress since Trump and Claude Juncker made a pledge in 2018 to work towards reducing industrial tariffs.