U.S.-China Pact Leaves Currency Watchers Mostly Unimpressed
The U.S.-China trade deal reaffirms the nations’ G-20 commitments to forgo competitive devaluations.
(Bloomberg) --
The U.S.-China trade deal includes a foreign-exchange agreement that reaffirms the nations’ commitments to avoid competitive devaluations. Currency watchers were mostly unimpressed.
The two-page currency chapter of the broader accord signed in Washington on Wednesday lays out an enforcement mechanism if either side fails to adhere to International Monetary Fund and Group-of-20 commitments.
The U.S. and China agreed to publicly disclose data including foreign-exchange reserves and figures on imports and exports as proof that neither side is manipulating exchange rates. But the general take from most analysts was that it offered little news on the currency front.
“It still remains to be seen on enforcement of the exchange-rate component and the deal overall,” said Torsten Slok, chief economist at Deutsche Bank AG. “So we have to stay tuned with regard to the yuan.”
In what analysts saw as a concession to China before the signing, the U.S. Treasury on Monday said China is no longer a currency manipulator. At President Donald Trump’s direction, Treasury Secretary Steven Mnuchin in August made an unusual move to name China a currency cheat as trade tensions rose, before removing the tag this week.
A commitment from the Americans to make a public promise to remove that label at a later date was rejected by the Chinese, according to one person familiar with the matter.
“Nothing new on disclosure, that’s disappointing,” said Brad Setser, who worked at Treasury during the Obama administration and is now at the Council on Foreign Relations. “The rest is mostly a reiteration of China’s existing IMF and G-20 commitments.”
Optimism ahead of the agreement signing and after Treasury’s removal of China from its currency watch list drove the yuan on Tuesday to its strongest since July. The offshore yuan was little changed after the signing, at 6.88 per dollar.
Treasury’s foreign-exchange policy report released Monday said China “needs to take the necessary steps to avoid a persistently weak currency.”
If issues arise between the two countries and there’s a failure to arrive at a resolution, either may request the IMF to undertake “rigorous surveillance” of the policies agreed to, or initiate formal consultations and provide input, according to Wednesday’s deal.
Yuan Moves
The onshore yuan is likely to stay just below 7 per dollar following the trade pact, according to Raymond Lee, a money manager at Kapstream Capital in Sydney. “With this deal that’s been done and China telling the U.S. that they’ll watch their currency, I don’t think they’ll allow it to get above 7.25,” he said.
Mark Sobel, a former Treasury and IMF official, said the agreement does appear to give the U.S. administration a way to penalize China if it doesn’t follow the mandates.
“What is new involves the relationship between the currency chapter and the bilateral dispute resolution mechanism,” he said. “In essence, the text indicates that if the U.S is unhappy over some aspect of FX policy, it can unilaterally make recourse to the provisions of that mechanism, including tariffs.”
Currency policy has emerged as a tool for Trump to rewrite global trade rules that he says have hurt American businesses and consumers. Foreign-exchange policy is a key piece of trade pacts with Mexico, Canada and South Korea.
The Trump administration has considered measures to counter the dollar’s strength, including direct intervention, though at one point last year officials said that step had been ruled out. Still, Trump has continued to lament the greenback’s strength, which is a drag on U.S. companies’ overseas earnings.
Less Substance
For Michael Cahill at Goldman Sachs Group Inc., the accord has less substance on exchange rates than the U.S. trade deal with Mexico and Canada.
“I don’t see a lot new here and it’s less relative to what’s in the United States-Mexico-Canada Agreement, particularly given there is no agreement to publish intervention data,” said the strategist. “There’s nothing in it that significantly alters our outlook for the yuan. We see the currency moving to 6.85 in three months -- so close to flat.”
The signing of the long-awaited deal might have helped the market mood on the fringes but UBS Wealth Management cautions that the agreement still has its limitations. The disruptions to business investment and supply chains inflicted by tariff wars are unlikely to be undone any time soon, according to Mark Haefele, the global chief investment officer at UBS Wealth.
“We see the deal as representing a partial calming rather than an end to trade tensions,” Haefele said in a client note on Thursday. “This should be sufficient to allow risk assets to advance, and we are overweight emerging-market equities and U.S. dollar-denominated sovereign bonds. Looking past a phase-one deal, we cannot rule out that U.S.-China tensions flare up again.”
--With assistance from Ruth Carson and Anooja Debnath.
To contact the reporters on this story: Saleha Mohsin in Washington at smohsin2@bloomberg.net;Liz Capo McCormick in New York at emccormick7@bloomberg.net
To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, ;Alex Wayne at awayne3@bloomberg.net, Mark Tannenbaum
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