Three Takeaways From The Treasury’s April FX Report

The report also alludes to ways in which higher trade barriers are reshaping global trade relationships. Vietnam's record surplus with the US is partly explained by "ongoing shifts in Asian supply chains". A policy objective of greater fossil fuel "independence" is flagged as a factor which could contribute to a growing trade surplus for Mexico with the US.

Here, we look at the three main takeaways for markets from last week’s FX Report.

1 Language has changed, implications have not

There was indeed a change in language in the April 2021 FX Report compared to the latest editions under Secretary Mnuchin. The decision to drop the manipulators tag from Switzerland and Vietnam – and by extension, not labelling Taiwan - was accompanied by an analysis of the conditions that would allow the Treasury to designate a manipulator. According to the 1988 Act that established the FX Report, a country is named a manipulator if its currency practices are aimed at preventing balance of payment adjustments or gaining an unfair competitive advantage in international trade.

The Treasury found “insufficient evidence” to determine that any country in the report has manipulated their currencies for those specific purposes. But since Switzerland, Vietnam and Taiwan met all three criteria, the Treasury decided to either continue (Switzerland and Vietnam) or start (Taiwan) bilateral talks with the local monetary authorities. That is not different from what an official manipulator designation would imply, at least in the first year.

So, in practice, the implications for the three countries have not changed materially, and they will still need to prove that they are not manipulating their currencies to gain competitive advantage in the bilateral talks that are set to extend for longer. While this may not be particularly problematic for a country like Switzerland, which has been explicitly used FX intervention as a monetary policy tool, two heavily export-oriented countries like Vietnam and Taiwan will likely continue to run a bigger risk of being treated as a manipulator.

2 The Treasury is likely moving away from the equally-weighted criteria approach

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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...

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