Currency Markets


The BIS’s Currency Turnover Toss

2019 October 19 by

The Bank for International Settlements released preliminary triennial foreign exchange and over the counter derivative survey figures as of April continuing decades of tracking these trends for central bank reference. The G20 endorses this data collection from over 50 countries and one thousand banks and dealers, with trades reported in unconsolidated form. Daily currency turnover averaged $6.5 trillion compared with $5 trillion in 2016, with the dollar on one side of almost 90% of transactions, followed by the euro (30%) and yen (15%). Emerging market share rose 4% to one-quarter the total, although the Yuan portion stayed in eighth place overall tied with the Swiss franc. Spot fell to 30% and swaps picked up to almost half, with non-deliverable forwards (NDFs) also increasing. “Other financial institution” engagement with counterparties like hedge funds was over half of volume, and sales desks in the US, UK, Hong Kong, Singapore and Japan took 75% of operation. Japanese retail traders hiked bets on high-yield developing units including the Brazilian real, Turkish lira and South African rand, while the pound, Australian and Canadian dollars combined also came to one-quarter the global sum. Yuan trading was $285 billion on a 95% dollar pair, with the Korean won, Indian rupee, and Mexican peso ascending the ranks at $100 billion plus. FX swaps were over $3 trillion and mostly in less than one week maturities, with forwards at medium term up to three months. NDFs drove the latter uptick, concentrated in Brazil, Korea and India markets. Prime broker handling was $1.5 trillion/day, with traditional institutional investor lines down. Asian financial centers had 20% of the business, with mainland China processing almost $150 billion as the number eight biggest location. Cross-border versions fell from two-thirds to half the amount, the lowest level this century.

Interest rate derivatives more than doubled to $6.5 trillion from $2.7 trillion on increased hedging and positioning, mostly in short-term contracts. Forward and swap agreements accounted for 60%, and dollar and euro-denominated activity were respectively half and a quarter of the total. The Yuan and won together were 1%, and Hong Kong had 5% of the overall market. So-called back to back and compression trades were main contributors, with the latter designed to keep net exposure constant. Swaps were again the leading category generally at two-thirds the amount, and the Mexican peso portion was roughly equal at 0.5%. Eastern Europe interest quadrupled to $20 billion, and the Russian ruble came in over $1 billion daily. The UK intermediated half of derivatives, with Europe’s other hub France, only at 1.5%, around the same level as Australia, Canada and Japan. Hong Kong benefited from Australia dollar contracts, and Singapore’s control dipped slightly to 1.5%. China, Korea, India and South Africa had 0.1-0.2% claims, reflecting offshore EM preference, the BIS noted. The final calculations will be presented in December amid clamor over undue dollar strength and dominance in trade and capital flows, as developing currencies and financial markets underperform and face US government competitive and geopolitical maneuvers. The next Triennial report is also widely expected to track Bitcoin and its peers as coverage turns over to new technology.

The US Treasury’s Lengthening Litmus Tests

2019 June 22 by

The Treasury Department’s regular review of major trading partner currency policies again did not label China a manipulator on evidence of reduced direct intervention, while calling attention to state controls and subsidies that still constitute “unfair practice.” In tariff negotiations Beijing has reportedly pledged exchange rate restraint, as market determination provisions were written into Washington’s new agreement with Canada and Mexico. Elsewhere in emerging Asia, Korea was praised for better disclosure and India was dropped from the monitoring list with the three criteria no longer applying, while Malaysia, Singapore and Vietnam were added. The thresholds will be tighter in future reports to cover all countries with at least a $20 billion goods advantage; 2% instead of previous 3% current account surplus; and unilateral interference over 6 months equal to a minimum 2% of GDP. With the definition expansion 15 partners will be tracked in detail in the context of the Department’s analysis of “important” developing economies. It expresses “significant concerns” over the renimbi level against the dollar after 5% depreciation with the $420 billion bilateral trade imbalance last year. China should continue shifting from fixed investment to household consumption, widen foreign access through structural policies, and boost reserve management transparency. Its G-20 commitment not to competitively devalue will be further examined at the June summit in Japan, as global current account imbalances have been “broadly stable” since 2015 at close to 2% of GDP with Japan and Germany also in the top surplus ranks.

In 2018 emerging market portfolio outflows were $300 billion, but stable FDI offset them, as headline global reserves stayed constant at $11.5 trillion. Non-G3 currencies’ share of the total is now 8%, representing dollar diversification even as pools often exceed short-term debt and import needs. As of May with economic slowdown and bank deleveraging Chinese depreciation pressure is again clear, with net foreign exchange sales amid minor leakage from the $3 trillion reserve pile as documented in the errors and omissions balance of payments category. To keep 6.5% growth Beijing should avoid credit easing and off-budget moves that can distort the Yuan’s value, as broader reforms including on non-tariff barriers strengthen it over time, in Treasury’s view. Korea was excused as the goods surplus fell below $20 billion on higher US fuel and chemical exports. Intervention has been negligible, as officials stress domestic demand stimulus and labor market changes as core competitiveness strategies. Singapore runs external income and services deficits, but manages the local dollar as the main monetary policy tool as the IMF estimates current 5%-plus undervaluation. It has recently shared intervention data with a six-month lag, and may adjust the mandatory pension formula so that citizen savings can be diverted potentially into foreign assets. Malaysia’s surplus with the US was almost $30 billion last year, and the central bank sold the dollar equivalent of 3% of GDP to defend the ringgit, although exact details are unknown. Vietnam’s was $40 billion and it has been a big export relocation base from China even before the tariff fight with the Trump administration. It operates a dollar peg within a tight range and does not publish intervention statistics, and as reserves meet standard adequacy metrics flexibility and transparency should be watchwords to match the watching brief.

The US Treasury’s Currency Report Backfire

2018 November 19 by

The US Treasury Department’s twice yearly review of possible exchange rate manipulation singled out Asia and emerging markets China, India and Korea in particular, to alter investor perception into next year as other regions escape continued monitoring and punishment threats. The three quantitative criteria on trade and current account surpluses and intervention size were applied under 2015 revisions, and Japan was given a pass without explicit intervention, while Taiwan dropped from coverage altogether.  India “shifted markedly” from 2017’s heavy currency purchases above the 2% of GDP threshold, but with rupee decline and an underlying current account deficit operations were only $4 billion through June, and it too could disappear in the next update if the bilateral trade surplus falls.

Korea has a 5% balance of payments surplus exceeding the 3% of GDP minimum, and the won has depreciated against the dollar this year although the International Monetary Fund still considers it undervalued. The central bank has been relatively quiet but does not disclose interventions, with greater transparency pledged in 2019. China analysis was the core theme amid rumors it could be again branded a manipulator after a 25-year hiatus. The report noted that despite Yuan slippage in recent months, the bilateral exchange rate in nominal terms was the same as a decade ago, amid “non-market” economic policy of stricter state control. The trading range between 6.8-6.9/dollar remains narrow and will swell future surpluses, and exchange rate practice is “disappointingly” hidden even if manipulation is no longer as plausible a finding as in past appreciation.

On capital flows net emerging market portfolio allocation outside China was negative $115 billion through mid-year, while stable foreign direct investment enabled “slightly positive” overall balance. In China outflows reversed, with stock and bond buying ahead of FDI for the period at $90 billion and $65 billion, respectively. Headline global reserves rose $40 billion to $11.5 trillion in the first half, with net accumulation despite higher dollar value adjustment. The Asian economies in focus have excess holdings beyond short-term debt and import needs. The IMF preaches against this tendency and instead urges “stronger policy frameworks,” according to the Treasury document.

It decries China’s “pervasive” subsidies and unfair trade behavior, while acknowledging “neutral” currency intervention estimated at $45 billion in the second quarter. Beijing may now be emphasizing administrative controls such as resuming the countercyclical factor in the daily fluctuation band, as it repeats the G-20 commitment to skirt competitive devaluation. Reserves are steady at $3.1 trillion with negligible capital exit outside the errors and omissions account, which indicates underground movement. The goods surplus will persist despite a services deficit even with GDP growth dipping to the 6.5% range until market forces and household consumption gain prominence, the US government warned.

At the IMF-World Bank gathering in Bali, Fund Managing Director Christine Lagarde rejected manipulation claims as China’s central bank head lauded a “reasonable equilibrium level” and analysts argued that a drop below 7/dollar was not a line in the sand. However during the meetings, international investors sold $150 billion under the Hong Kong Stock Connect, as the foreign exchange body SAFE revealed almost $5.5 trillion in total overseas liabilities. US Treasury Secretary Steven Mnuchin insisted that currency provisions would be part of any future trade understanding, following the model of the recent US-Mexico-Canada renegotiated agreement. Vice President Mike Pence set the stage in advance of the report with accusations of currency distortions and intellectual property “theft,” but bond managers largely shrugged off the rhetorical torrent in oversubscribing a $3 billion Chinese sovereign bond. They cited healthy central government figures in comparison with local authority off-balance sheet “titanic credit risks” of $5.75 trillion, according to rater Standard & Poor’s.

Korea is also in Treasury’s crosshairs as a currency clause was lacking in the revised bilateral free trade pact, and the IMF believes the won is currently 5% undervalued. It does not publish data on interventions presumably confined to “disorderly markets” from $400 billion in reserves, but promises to start next year. To reduce outsize external surpluses, the US called on Seoul to further stoke domestic demand despite onerous household debt. It welcomed the 2019 budget’s 10% spending increase, but the stock market is down by the same amount through September pending more decisive currency and credit cleanup.


The Treasury Department’s Manipulation Dodge Dudgeon

2018 May 16 by

As the Trump administration demanded currency provisions in the NAFTA and Korea free trade agreements under renegotiation, the Treasury Department again found no formal manipulation among major partners in its regular surveillance report mandated under 2015 legislation. It lists detailed criteria for monitoring: at least a $20 billion bilateral surplus equal to 3% of GDP and unilateral intervention over 12 months at 2% of that figure in scope. India was the only emerging market added alongside China and Korea, while Latin America was dropped altogether. China’s Yuan rose against the dollar in 2017, but was unchanged against a broader basket, and the report criticized “non-market” economic development and lack of reserve management disclosure. Korea’s current account surplus was 5% of GDP on near 15% won appreciation, both diverging from fundamentals in the IMF’s view. India bought $55 billion in foreign exchange on heavy direct and portfolio investment inflows, and its reserves may be excessive with existing capital controls. Germany, Japan and Switzerland were the other countries highlighted, and Washington urged Tokyo only to intervene in “exceptional circumstances.” as it presses for a possible bilateral accord to succeed the Trans-Pacific Partnership. Prime Minister Abe on a White House visit asserted that loose monetary policy was designed to boost growth and that the safe haven yen nonetheless continued to rise, as the upcoming Trump-Kim Jong Un summit was the main topic. For the group the Treasury lamented persistent global imbalances due to insufficient domestic demand and currency adjustments, although it noted a one-third jump in net private capital flows to developing economies which helped boost reserves to $11.5 trillion. The total provides “ample coverage” of short-term debt and import costs, so better policies rather than accumulation is the preferred course, the survey remarked.

China’s goods surplus was $375 billion last year, and the renimbi was up almost 4% versus the dollar in the first quarter. Capital outflows plummeted to $150 billion in the second half from $350 billion in 2016, as estimated currency sales fell below $10 billion with the central bank still not publishing the data. It must also be wary of near 15% credit double GDP growth as it tries to facilitate financial system deleveraging. Korean domestic demand has picked up under new leadership committed to export offset, but adjustment remains “limited.” The US has a services surplus, but the IMF still considers the won undervalued as $400 billion in reserves are deployed in unreported spot and forward transactions. India has a 2% of GDP current account gap but goods and services surpluses with the US and has been “exemplary” in reporting intervention the central bank claims is a result of “undue volatility.” The rupee has appreciated in real terms and is “moderately overvalued” in the IMF’s calculation, so deliberate debasement is a remote scenario. The update concludes with a section on capital flow volatility based on a sample of 70 developing economies, and finds that current trends roughly reflect pre-crisis ones, although it has spiked in a handful like the BRICS, Korea and Taiwan. In Mexico and Russia both inflow and outflow swings are greater as respective free trade and sanctions deviations skew the standard, it suggests.



The Treasury Department’s Maiden Manipulation Artifice

2017 April 22 by

The Trump Treasury Department released its first review of major economy foreign exchange policies after a bilateral summit with China and before the IMF spring meeting, with no Asian partner called a manipulator while Latin America was dropped from coverage altogether. It followed new criteria from 2015 legislation concentrating analysis on countries with at least a $20 billion trade surplus, a current account one at minimum 3 percent of GDP, and annual currency unilateral intervention of 2 percent of output. No country met all three criteria and the report noted reduced interference the past two years, but questioned whether the shift was just a temporary response to capital outflow trends. It reiterated the claim during the campaign that the US has been “unfairly disadvantaged” by artificial distortions and placed China, Japan, Korea and Taiwan and Germany and Switzerland on respective regional monitoring lists. The US current account gap was shaved to 2.5 percent of GDP in the second half of 2016, but the net international investment position slumped to an $8 trillion deficit.  The world economy expanded 3 percent, the slowest rate in a decade, and global demand distribution remains “highly imbalanced.” Fiscal and monetary policy can correct the tilt but structural reforms, particularly greater competitive access for private versus state-owned firms should be a priority. Chinese capital flight last year was due to local rather than foreign investor exit, including outward direct allocation by big government companies, but new limits have diminished the pace. Outside China net emerging market inflows continued into the last quarter, but currency performance was mixed, with a 15 percent Mexican peso depreciation, while the Taiwan dollar and India rupee were up almost 5 percent against the dollar. The first quarter of this year solidified appreciation tendencies, but global reserves fell marginally to $11 trillion at end-2016 as China and big oil exporters sold off holdings. The figures cannot distinguish between valuation adjustments and interventions, and future reporting and statistical efforts should redress the discrepancy, Treasury urges.

China’s large scale one-way anti-appreciation moves lasted a decade and harmed American workers and business, but from mid-2015 to February 2017 Beijing sold an estimated $800 billion to resist opposite depreciation direction. The authorities still must improve communications and transparency and open further to US goods and services while boosting domestic consumption, the analysis warns. During his recent Florida visit President Xi pledged further banking and securities industry liberalization, but observers pointed out the same commitment from Obama administration economic dialogues yet to permit rule-based majority foreign ownership. Korea too continues to run an outsize current account surplus, and the IMF believes the won is undervalued. Intervention in the spot and forward markets was $6.5 billion or 0.5 percent of GDP, reserves are triple short-term external debt and operations should only occur in “exceptional circumstances.” Taiwan has a pegged exchange rate and its dollar jumped 7 percent versus the greenback in the first quarter. Foreign currency purchases in 2016 were $1 billion/month, and outside experts put undervaluation at 25 percent. It is not an IMF member so does not publish the same reserve data as all other big Asian emerging economies to potentially flag irregularities.

The Trump Triumph’s Truculent Trades

2016 November 10 by

Emerging market currencies, particularly Asian and Latin American ones in the cross-hairs of promised trade pact renegotiation and retaliation, were roiled by US President-elect Trump’s victory, which may also coincide with a Federal Reserve December rate hike with good continuing job and GDP growth numbers.  Protectionism would exacerbate the underlying trend of flat global export expansion as countries try to shift to boosting domestic demand, aided by cross-border capital inflow return as of mid-year according to industry and official figures. They may also ease fiscal and monetary policies, but deficits and possible exchange rate implications narrow maneuvering room. Units in Mexico, Korea, and China have been most directly exposed, but the impact reaches to South Africa’s rand as a universe proxy, the zloty as an EU estrangement bet and Russia’s ruble as a reconciliation one, and to Middle East plays that may reflect future commodity and geopolitical direction. The Mexican peso dipped below 20 per dollar after the win, as authorities prepared to intervene after meeting the budget deficit target and raising benchmark rates 150 basis points the past six months. State oil company PEMEX bonds also fell as the December block auction may receive few bids pending the Washington administration shift, which could jeopardize $15 billion in proposed facility spending. The central bank and finance ministry announced contingency plans ahead of the election to sell dollars from reserves, and the Trump campaign’s immigration, border wall and NAFTA revision platform sours the outlook but they have refrained from action barring major depreciation translation into consumer inflation, projected at 4 percent next year. The candidate blamed the tripartite trade deal for the loss of manufacturing jobs north of the border and threatened to scrap it, while Democratic Party standard bearer Clinton also pushed for further labor and environment standard changes. Despite the pressure on Mexico’s auto and assembly operations services have been a main pillar of 2 percent GDP growth and would not be as upset by treaty overhaul. Remittance flows have been slowing even with US real estate recovery, but mass illegal migrant deportation would further pare them while swelling joblessness at home as another minimum wage increase is under consideration.

Korea’s won as an export heavy Asian proxy has also been battered, after it was named along with China on the US Treasury’s currency manipulation watch list, with the central bank warned to interfere only with “disorderly” movements. The bellwether Samsung conglomerate is literally under fire for exploding batteries in its smart phone, and lead shipping group Hanjin is barely afloat after state bank rescues. Overseas sales dipped 3 percent in October and growth will be only 0.1 percent this quarter according to estimates. North Korea saber-rattling has been frequent in recent months with ballistic missile tests focusing attention on continental nuclear capability. President Park may have entered lame duck status early amid resignation calls after she admitted to a long personal and professional relationship with a fortunetelling adviser, who may have used influence to secure contracts and tip policy decisions.  She reshuffled the cabinet and offered a public apology accepting an independent inquiry with her popularity at a record low 5 percent. The stimulus budget is on hold, and pledged structural reforms may await her successor in another featured anti-establishment contest.



The BIS’ Overturned Currency Turnover

2016 September 14 by

The Bank for International Settlements’ triennial foreign exchange and interest rate derivative surveys underscored increased emerging market trading shares largely at the expense of the euro and yen with continued dollar dominance. For twenty years the Basel-based organization has compiles these statistics and the latest effort drew on 50 central banks assembling data from over 1000 commercial banks and institutional dealers. Daily currency turnover was $5.1 trillion, down from $5.4 trillion in 2013, but when adjusted for dollar strengthening it rose 5 percent. The greenback was again on one side of the trade almost 90 percent of the time, while the euro dropped to 30 percent from ten points higher in 2010 due to the Eurozone debt crisis. The yen also slipped to 22 percent and the Aussie dollar and Swiss franc also slipped 1 percent for 5 percent range chunks. Emerging economies’ rise was “significant,” as the Chinese renimbi replaced the Mexican peso as the leader with $200 billion in daily activity and doubled its global slice to 4 percent. The Russian ruble also dropped on the list to almost 20th place at 1 percent, while Asian currencies including the Korean won, Indian rupee and Thai baht improved, ranking between 15-25. Brazil’s real, Turkey’s lira, and South Africa’s rand were in the top twenty rung. The spot market declined 20 percent over the three-year period to $1.7 trillion/day for one-third of volume, while swaps jumped 5 percent to $2.5 trillion for almost half of trading, although the growth rate slowed from the 2010-13 25 percent clip. Outright forwards were the largest segment at $700 billion, while options shrank by one-quarter to $250 billion, and they tended toward longer one week to one year maturities. By counterparty non-bank dealers raised their portion to 40 percent, while non-reporting smaller and regional banks contributed 20 percent of turnover and institutional investors were involved in 15 percent of trades, particularly swaps. Hedge fund and bank proprietary arm participation was off 30 percent to $200 billion daily, reflecting business and regulatory retrenchment. By hub location the UK took almost 40 percent as of April 2016 before the Brexit vote, and the US was constant with 20 percent. Asia specifically Tokyo, Hong Kong and Singapore boosted intermediation from 15 percent to 20 percent of the aggregate, aided by Chinese Yuan focus.

The companion over-the-counter interest rate derivatives reading traced a daily uptick to $2.7 trillion from the previous $2.3 trillion, with the dollar supplanting the euro as the most popular currency. Countries with negative interest rate such as the Nordics had sharp falls, while sterling and the Australian and Canadian dollars jumped. Emerging market units gained, but the greenback’s surge over the timeframe “understated” the shift, with contracts spiking for the Mexican, Chilean and Colombian pesos and Hungary’s forint. Hong Kong and Singapore dollar transactions were also up, while Chinese renimbi, Indian rupee and Brazilian real engagement slipped double-digits. Swaps were the chief driver at 70 percent of business, and the US edged out the UK as the leading processor, each with around 40 percent shares. In Hong Kong and Singapore daily dealing exceeded Tokyo’s $55 billion, which slid 20 percent from 2013 on Abenomics’ long-term zero interest rate policy trying to topple deflation assumptions.


The G-7’s Wrung War Cry (Asia Times)

2016 June 2 by

The G-7 summit in Japan, despite currency war talk, was a tame event hardly moving Asian financial markets. It was mostly notable as US President Obama’s valedictory after stops in Vietnam and Myanmar, where bilateral trade and investment clashes were also avoided. Several years into the Abenomics experiment the hosts scrambled for fresh fiscal and monetary approaches to defeat deflation and revive the domestic economy, and irked Washington with the threat of yen intervention beyond previous agreement only in “disorderly conditions.” The issue disappeared on its own during the meeting as the Federal Reserve signaled a June interest rate hike again lifting the dollar. Chinese currency devaluation fallout also faded as a concern, as the yuan seemed to stabilize on minor foreign exchange reserve growth with reduced capital outflows. Foreign investors have yet to return in size to the mainland, but an MSCI nod to boost its equity index weighting along with recent opening of the local bond market could shift direction. Vietnam and Myanmar highlighted the Obama administration’s respective foreign policy breakthroughs with the Trans-Pacific Partnership and military-civilian rule transition, but questionable human rights and economic policies were likewise prominent to underscore near-term business and financial community skepticism.

Prime Minister Abe attempted to promote joint stimulus as he presented a faltering global recovery scenario hinting at a 2008 crisis repeat. US and European representatives dismissed the scaremongering as they focused on their own regional issues, including elections, the EU refugee influx, and Greece’s interminable bailout. Asian security problems featured such as Beijing’s claims in the South China Sea and North Korea’s nuclear missile launch, but the economic agenda largely revolved around more specific structural reform pledges. In Japan’s case corporate governance and labor market flexibility moves will go further, according to officials, but the immediate linchpins of its growth package are consumption tax delay and public works rebuilding in earthquake areas. This strategy kept local financial asset sentiment negative as fund managers considered boosting neighboring emerging market bond and equity allocation. Despite negative bond yields at home, banks and insurers have preferred other industrial country instrument abroad with low returns, and in stocks individual investor fund positions continue to show outflows as so-called Mrs. Watanabes have been burned continuously on currency swings.

Both Vietnam and Myanmar have cozied up to the US, Japan and Europe to distance themselves from the Chinese economic and geopolitical orbit, but the entire Mekong region also blames Beijing for aggravating its original El Nino-induced drought. The water level in the main river artery is at a century low, and Vietnam’s rice output was down 10 % in the last quarter as GDP growth slipped under the 6 % preliminary forecast. Farmers accuse China of blocking irrigation with its gate control over hydroelectric dams, and many also use pesticide that damages crops and the environment, according to experts.  At the same time, the state-owned rice trading and export apparatus has deep job and patronage tentacles defying change, and it would be among the last candidates under the country’s phased TPP commitment to privatization. Free labor practices are also to be adopted within 5 years of treaty ratification to replace the current worker union monopoly. With rising wages strikes are more frequent and the government has been quick to crack down on activist members. During President Obama’s visit such advocates were reportedly in detention, angering congressional members who accompanied him as they prepare to vote on the free-trade pact, which will enlarge Vietnam’s economy 10% in the coming decades, the World Bank estimates.

Vietnamese three hundred listed stocks have been flat for the year with the mixed messages, but investor enthusiasm still far exceeds Myanmar’s new exchange with its one company available. Aung San Suu Kyi wields ultimate power and is said to have a 100-day plan with scant economic details. Coincident with President Obama’s G-7 swing the US left individually-targeted commercial and banking sanctions in place. The IMF slashed the growth projection to 7 percent and decried persistent high budget deficits and inflation, with the battle there barely begun.

The Treasury’s New Currency Interference Signal

2016 May 24 by

The US Treasury Department issued the first version of its periodic currency manipulation report under 2015 trade enforcement legislation overriding the 30 year-old Omnibus Competitiveness Act, which details specific criteria and remedial action triggers in response to the long China debate and congressional consideration of binding guidelines in the proposed Trans-Pacific Partnership. Five countries were named to the “monitoring list,” including Germany outside Asia in view if its second highest global 8 percent of GDP current account surplus, 5 percent above the qualifying threshold under the process. The other two perquisites are a minimum $20 billion bilateral trade surplus and annual net reserve buying of more than 2 percent of GDP. Analysis then turns to potential undervaluation and investment limits, and if they exist the Treasury Secretary must first engage in consultations and after a year take measures that could include federal government contracting suspension, increased IMF surveillance, or trade pact retaliation. These responses are not automatic and can be waived on cost or national security grounds. The monitored countries are not yet at this stage and other emerging economies including Brazil, Mexico and India are regularly under review. China is a perennial feature with a $350 billion 3 percent of GDP current account surplus last year, the first one at that level since 2010. It sold foreign exchange reserves to miss that criterion and the currency was “more market-determined” in contrast to previous declarations of aggressive devaluation. Japan made the surplus cut but has not intervened for four years, although the Treasury warned that even with recent wide swings the dollar yen market was “orderly” and thus should be left alone under current G-20 commitments. Korea was admonished for several years of anti-appreciation operations beyond allowable “disorderly conditions” and put on notice that it among the group could soon enter the next anti-manipulation phase.

Taiwan had the largest surplus at almost 15 percent of GDP and accumulated more than 2 percent in reserves but the bilateral imbalance fell short of $20 billion. Germany had not before been a currency policy target and its Eurozone surplus too was 3 percent, which was labeled “excess saving that could support domestic demand and global rebalancing.” The IMF separately was at odds with German officials over Greece’s fiscal retrenchment needed to stay in the single currency and unlock the delayed portion of last year’s EUR 85 billion package. It also reiterated the concept of debt relief as the burden hovers at 200 percent of GDP five years after consecutive EU rescues and private bond restructurings. The main state banks must be recapitalized once again as deposit leakage continues, and Prime Minister’s threatened resort to another public referendum on actions came up empty. The new exchange rate enforcement provisions got 75 percent bipartisan backing before the presidential election campaign went into full swing with the issue particularly in play from respective Democratic and Republican contenders Sanders and Trump. Both oppose Pacific free trade and have been harsh on Chinese currency practice despite the latest findings, with Beijing again memorialized as a master manipulator.

The Treasury Department’s Manipulated Currency Crescendo

2014 May 1 by

The Treasury Department’s International Affairs office again found no outright manipulation in its semi-annual update on main trading partner exchange rate practice under 25-year old legislation, although it cited “inadequate” global demand rebalancing and increased intervention and reserve accumulation toward the end of 2013. The lack of adjustment undermines the recent G-20 commitment to boost GDP growth 2 percent over the next five years, and Germany and China in particular must change their models, the report urged. Germany’s current account surplus is over 7 percent of GDP as the rest of the Euro-zone also exhibits positive external accounts often due to weak internal purchasing power. Last year the Chinese renimbi appreciated 3 percent but in the first quarter swung the same amount in the opposite direction as the daily fluctuation band doubled to 2 percent. Market determination remains “incomplete” in light of last year’s $450 billion in balance of payments inflows bringing reserves to $4 trillion and productivity gains suggesting undervaluation. While the intent may be to inject two-way volatility “serious concerns” include the absence of intervention and reserve data under the IMF’s SDDS standard as a big emerging economy outlier. Officials have hinted that depreciation against the dollar may continue as they gradually deflate credit and property bubbles while preserving 7.5 percent output expansion. A new mini-stimulus program was ruled out as Q1 social financing figures show a sharp dip in trusts and corporate bonds. The central bank has imposed tougher rules on the former and the latter was shaken by a handful of defaults. Real estate developers are already highly-leveraged and face currency strains from borrowing abroad as sales slow noticeably outside major cities. They have been battered on the Shanghai and Hong Kong exchanges as the two launched individual investor cross-trading in an attempt to lift sentiment. The Treasury survey also profiled Taiwan which had its biggest current account surplus since the 1980s the past year and maintains capital account restrictions. The managed float regime has been uneven and its $415 billion in reserves are “excessive by any metric.”   Unlike other major developing markets the main portfolio outflow source with curbs since the Federal Reserve’s tapering signal last May was not foreign investors but local life insurers allocating overseas.

Korea was criticized despite its pledge to forgo competitive devaluation as the current account surplus was the highest since the Asian financial crisis with authorities intervening “aggressively” against won strength. Personal consumption has been hampered by household debt, but President Park has unveiled reforms to double per-capita income to $40,000 and shift away from exports dominated by the chaebol groups that again incited public outcry with recent disclosures of top executive compensation packages. Brazil’s $85 billion short dollar position under its swap and spot operations also was highlighted in the brief survey and its hedging and liquidity rationale was given a pass through mid-year in a bow to opinion manipulation.