US Treasury report on FX manipulation is the next big thing - HSBC

Analysts at HSBC explain that the US Treasury report on FX manipulation is due mid-April and they do not expect any countries to be labelled a manipulator; but the tone of the report could be more aggressive and if the US Treasury does name a country, the move could be counter-productive and lead to USD strength

Key Quotes

“The US Treasury’s report on currency manipulation is fast approaching and given the stronger rhetoric from the new US administration on trade protectionism and unfair currency practices the attention on the report should be significant. Although the report is expected mid-April, it could come out at a later date, as has happened in the past. In our view, we see four main scenarios for the Treasury report:

1. US Treasury names a big country as an FX manipulator

During his campaign, President Donald Trump promised to name China a currency manipulator. However, we believe such a move is unlikely. China does not fulfil the current criteria to be labelled. While it is possible for the US Treasury to move the goal posts, the mere threat of ‘tit-for-tat’ measures could act as a deterrent. Additionally, such a move could be counter-productive and lead to notable USD strength – the opposite of what the US government wants – as the market considers the possibility of a more protectionist global trade environment. 

2. US Treasury labels a small country as an FX manipulator 

Alternatively, the US Treasury could label a smaller country. After all, this could also serve as a warning to other larger nations. We believe such as scenario would lead to modest USD strength as the markets return to a risk-off tone.

3. US Treasury ratchets up the rhetoric (our base case)

This is our base-case scenario. We expect the US Treasury to use much stronger language in its report, but without explicitly naming anyone a currency manipulator. This report would then be perceived to be a credible threat – in contrast to the past – and these issues would ‘go live’. The new administration’s approach of focusing on bilateral trade deficits will most likely lead to increased monitoring and surveillance. Some countries could also be cited as having ‘currency misalignment’. In this scenario, the USD could weaken as policy makers elsewhere become more tolerant of local currency strength for fear of being named, although this may have already been reflected in some USD-Asia pairs’ performance this year.

4. No notable changes from previous reports 

Although we believe it is very unlikely, the US Treasury could decide to deviate very little from its previous publications. If this is the case, then the USD would likely weaken as it could suggest the US administration’s rhetoric appears to be ‘more bark than bite’.