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Macro Note

US Apr 2021 FX Report: Resetting FX Relations, No Manipulator, Enhanced Engagement With 3 Economies

Monday, 19 April 2021 . Under the Biden administration and US Treasury Secretary Yellen, the US Treasury released its latest semiannual Report on “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the ” to the US Congress last Friday (16 Apr). The key

Alvin Liew takeaway was that no economy was labelled as currency manipulator in this report, even though Senior Economist (previously being added in the Monitoring List in Dec 2020) and (formerly [email protected] labelled as a currency manipulator in the Dec 2020 report) met all 3 criteria under the Trade Facilitation and Trade Enforcement Act of 2015 (2015 Act) while (also formerly Peter Chia Senior FX Strategist labelled as a currency manipulator in the Dec 2020 report) is deemed to have met only 2 of the [email protected] criteria this time round.

. The Treasury report concluded that, under the OMNIBUS Trade and Competitiveness Act of 1988 (1988 Trade Act), there is insufficient evidence to make a currency manipulation finding for Vietnam, Switzerland and Taiwan. In a departure from the previous administration, the Treasury said that for the latest decision, it is possible for economies to meet all three tests under Act of 2015 and not be manipulating their . Instead, the Treasury will continue with its bilateral enhanced engagements with Vietnam and Switzerland on their currency practices and it will also initiate enhanced engagement with Taiwan on the currency front.

. The Monitoring List was expanded to 11 members (from 10 previously) and continues to include , , , , , , and , as well as which were officially added in the Dec 2020 Monitoring list. After briefly being dropped in Dec 2020 report, Ireland was re-added to the List in the latest report, while the latest entry to the Monitoring List is , its first inclusion since Oct 2015, having met two of the three criteria in this Report, which is to have 1) a significant bilateral trade surplus with the US and 2) a material current account surplus over the reporting period. As Taiwan was put under the enhanced bilateral engagement, it was no longer included in the Monitoring List for this report.

. Another notable point was that besides Switzerland, Taiwan and Vietnam, two other economies, Singapore and India, were flagged out (again) for intervening in the FX market in a sustained, asymmetric manner (>2% of GDP and 6 out of 12 months), although the latter two economies are excluded from enhanced engagement with the Treasury on their currency practices for now.

. And while China was not made as the focus of the Apr 2021 report (unlike in previous reports), the Treasury continued to highlight its “significant bilateral trade surplus with the United States, with this surplus, accounting for a disproportionate share of the overall U.S. trade deficit.” It was also flagged for its “very limited transparency regarding key features of its mechanism, including the policy objectives of its exchange rate management regime, the relationship between the and foreign exchange activities of the state-owned banks, and its activities in the offshore RMB market”.

. Policy Outlook: Overall, the latest Treasury report did not rattle the financial markets. Even though the Treasury did not rule out future actions of labelling currency manipulators, the latest action looks like a reset of FX bilateral relations with the new administration while it plans to proactively engage with the economies that are deemed to run afoul of 2015 Act and 1988 Trade Act and with the spotlight on the FX practices of Switzerland, Taiwan and Vietnam.

US Apr 2021 FX Report: Resetting FX Relations, No Currency Manipulator, Enhanced Engagement With 3 Economies Monday, 19 April 2021 1 | P a g e

. This is the first report that was released on schedule in the month of April, after the COVID-19 pandemic and US domestic issues delayed the publication of this semiannual report since 2019. Barring any severe disruptions, we expect the next Treasury report to be released in the month of October 2021. The next key event to watch out for will be the 27/28 April 2021 FOMC (decision on Thursday 29 April 2021, 2am SGT) and will be accompanied by a Powell press conference but without an updated Summary of Economic Projections

. Please see Table below for the countries meeting the criteria set out by the US Treasury for currency manipulation. Click on the link to access the latest semiannual Report on “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States” dated 16 Apr 2021.

Checking The Boxes For FX Manipulation In US Treasury FX Report Apr 2021: Switzerland & Vietnam Removed From List

Trade Facilitation and Trade Enforcement Act of 2015 OMNIBUS Trade and Competitiveness Act of 1988 Major Trading Partner Criteria 1) Criteria 2) Criteria 3) Criteria 1) Criteria 2) Coverage (Total Significant bilateral Material current Engaged in persistent Material global Significant bilateral goods trade surplus with account surplus one-sided intervention current account bilateral trade trade >US$40bn) US (>US$20bn)+ (>2%) (>2% of GDP and 6 out surpluses surpluses with of 12 months) US China   (311bn) × (+1.9%) × (-0.1 to +1.2%)** ×  Mexico*   (113bn) (+2.4%) × (-0.2%)   Vietnam   (70bn)  (3.7%)  (4.4%)***   Switzerland   (57bn)  (+3.7%)  (15.3%)   Germany   (57bn) (+6.9%) × (--)   Ireland*   (56bn) (+4.8%) × (--)   Japan   (55bn) (+3.3%) × (0.0%)   Malaysia   (32bn) (+4.4%) × (0.6%)   Italy   (30bn) (+3.7%) × (--)   Taiwan   (30bn)  (+14.1%)  (5.8%)   Thailand   (26bn)  (+3.2%) × (1.9%)***   S. Korea   (25bn) (+4.6%) × (0.3%)   India   (24bn) × (+1.3%)  (5.0%) ×  Singapore  × (+US$4bn)  (+17.6%)  (28.3%)  × *Added in Apr 2021, **Treasury Est based on PBOC’s data, ***Data provided bilaterally to UST, +Over 4 quarters through Dec 2020. Source: The US Treasury (16 Apr 2021)

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