It's now official. The US Treasury says China is a currency manipulator. What's next?

Futures are reeling again, after hours, on news the US Treasury says China is a currency manipulator. As I type (6:40 PM central), the S&P 500 is down another 46 points.

That's 1.7% on top of a 3% decline on Monday.

Currency Manipulation?

In my way of thinking, China is a currency manipulator along with Japan, the ECB, and of course the US.

To me, QE, interest rate cuts, and direct intervention all strive to do the same thing: lower currency valuations.

However, I am not the official designator of the term.

China Not a Currency Manipulator

The definition of a manipulator is a country that spends 2% of its GDP or more on intervention. As far as I can tell, that isn't the case. https://t.co/tvnvApLjOH

— Kathy Jones (@KathyJones) August 5, 2019

Officially, Trump is a Liar

Even though I believe China is guilty, so is the US. That's merely my opinion.

More importantly, by official definition, Trump is a liar.

Anger Response

So the ECB, BOJ, SNB and Riksbank have negative interest rates but we determine that China is the currency manipulator whose currency is down a whopping 2.5% this year vs the dollar. Anger is now driving the approach towards China, certainly not economic logic.

— Peter Boockvar (@pboockvar) August 5, 2019

Where To Next?

Kyle Bass Warns Yuan Could Sink Another 40% If PBOC Pulls Support https://t.co/H6nZ2CIbzC

— zerohedge (@zerohedge) August 5, 2019

Just One Problem

The U.S. faces one fundamental problem in a currency war with China: right now, the market wants to push the yuan weaker, and the more the U.S. escalates, the more the market will test the PBOC ...https://t.co/SzUdGqHtCL

— Brad Setser (@Brad_Setser) August 5, 2019

Three Currency Manipulation Rules

The Wall Street Journal reports U.S. Designates China as Currency Manipulator

The decision to label China as a currency manipulator for the first time since 1994 comes just four months after the U.S. Treasury passed on an opportunity to make such a formal designation as part of its semiannual currency report.

Treasury uses three criteria to apply the designation: actively intervening in their currency markets, having large trade surpluses with the U.S., and having large overall current-account surpluses.

Three Criteria

1. Significant bilateral trade surplus with the United States
2. Material current account surplus
3. Country engaged in persistent one-sided intervention in the foreign exchange market

Test Three Fails

China fails test number two outright. It fails to test three on a percentage basis.

China has a huge trade surplus with the US but China does not have a "material current-account surplus".

Heck, China may not have any currenty account surplus.

Morgan Stanley says China's "current account shortfall could be 0.3 percent of its GDP and slip further to 0.6 percent in 2020."

The US Treasury has to understand this whether or not Trump gives a damn.

Flashback May 29, 2019

Please recall my May 29 post US Treasury Concludes "No Currency Manipulators", Watch List Expands to 9

The Treasury has three requirements for identifying currency manipulators. Seven countries meet two criteria. No country met all three criteria. Only Singapore met condition 3, but it did not meet condition 1.

Question of the Day

How soon will Trump propose modifying the rules so he can claim China is a currency manipulator?

Question of the Day Answered

My question of the on May 29 has now been answered.

Trump does not give a damn about rules, he simply instructed the Treasury to break them.

Totally Lost

Trump has totally lost it.

Destructive anger has set in.

Recession Coming Up

A Recession Watch is On.

At this juncture, it's too late to stop.

Trump will blame the Fed and the Fed will blame Trump.