Update: As we were advised earlier, and following their face to face overnight, reports confirm that Treasury staff have advised Secretary Mnuchin that China is not manipulating its currency.

In an interview with Bloomberg News on Thursday, Mnuchin declined to comment on the report.

“We are concerned about the depreciation” of the yuan, he said, “and want to make sure that it’s not being used as a competitive devaluation.”

The conclusion, if accepted by Mnuchin, would avert an escalation of the U.S.-China trade war and remove a source of anxiety for emerging markets. Mnuchin could issue a different finding.

One wonders just what they agreed…

As a reminder, if the U.S. labels a country a currency manipulator, Treasury must enter direct talks with the country, and also seek redress through the International Monetary Fund. The last country declared a manipulator was China, in 1994.

*  *  *

One of the residual risk factors that has been hanging over the market and depressing risk in recent days, was speculation that when the US Treasury releases its next semi-annual currency report on foreign exchange rate practices on October 15, China would be officially tagged as a currency manipulator after BP Mike Pence’s belligerent speech last weekend, prompting an even more aggressive currency war phase between the two nations.

To be sure, the market was skeptical of this outcome and as Barclays FX strategists Hamish Pepper told Bloomberg TV overnight, the grounds for China to be called an FX manipulator are “relatively weak”, adding that “there should be an acknowledgment that the intervention we have seen hasn’t necessarily been to go against the market in a big way.” Pepper also claimed that “the behavior we’ve seen from the PBOC in regards to the yuan has been to allow market forces to prevail” adding that a 6.95/USD level for the Yuan is one which both the US and China would be comfortable with.

And now, Politico confirms as much, reporting that when the Treasury Department unveils its report Monday, it won’t name China a currency manipulator.

The report submitted internally to Treasury Secretary Steven Mnuchin did not recommend that Beijing be labeled a currency manipulator and continued to place China on a monitoring list, an administration official familiar with the report told POLITICO” the report says.

While Politico concedes that it is possible that Mnuchin could revise the final report to include China, such a reversal would be extremely unlikely and there is no precedent for such action.

The April 2018 report found China met two criteria for being listed — having a significant bilateral trade surplus and an account surplus in excess of 3 percent GDP — but not the third and final requirement of having a “persistent, one-sided” intervention in its currency market. The U.S. has not labeled a country a currency manipulator in the report since China was given the designation from 1992 to 1994.

While the offshore yuan was already rising on the news, it hit session highs shortly after the Politico report.

And while the bounce has failed to last, the Dow also briefly rose back into the green as the report received a broader audience.


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