US adds India to its FX naughty list - Westpac

The US Treasury’s semi-annual FX report attracted increased attention given the trade tensions of recent weeks and no country was formally labelled a currency manipulator, but India became the sixth nation on the monitoring list, points out the research team at Westpac.

Key Quotes

“This report’s finding of no currency manipulation in H2 2017, rather than reducing the prospect of the US taking further protectionist trade action, instead is used more as a public admonition of specific countries whose trade policies upset the US.”

“Japan, for instance, remains on the monitoring list, avoiding the manipulator label only due to its lack of FX intervention in recent years. This is extremely unlikely to change but that didn’t stop President Trump last week tweeting that Japan had “hit us hard on trade for years!”

“Germany is also set to remain on the monitoring list for some time, due to its huge trade and current account surpluses, but the ECB’s lack of FX intervention will ensure Germany is not close to the manipulator label. German officials have rebuffed US calls to stimulate domestic demand before and will continue to brush off US complaints.”

“Being added to the monitoring list by the US Treasury report may not translate into a significant impact on the Indian rupee. It is unlikely that India will meet the criterion on current account surplus any time soon. RBI’s forward book, after expanding rapidly, has already started to fall since last September. There is even the possibility that India no longer meets the criterion on FX intervention in the next US Treasury report, though it will stay on the list in the next report as “once added, an economy will remain on the monitoring list for at least two consecutive reports”.”

“China stays on the list despite only meeting one of the criteria, thanks to the added measure that was introduced since the April 2017 report that “any major trading partner that accounts for a large and disproportionate share of the overall US trade deficit” will be added/retained.”

“In any case, we believe it is highly unlikely that China will target a certain level of the exchange rate in response to the trade conflicts.”

“Korea stays on the list as well, meeting the criteria on bilateral trade surplus with the US and current account surplus. Korea does not publish FX intervention data, while the US Treasury estimated it to be at 0.6% of GDP in 2017. Focus now is on how Korea will improve the transparency of its intervention, as the authorities have shown intention to disclose some data.”

“From forward book data and US estimates in the past two years, it does not appear to be too difficult for Korea to continue to avoid meeting this FX intervention criterion.”