Morning Commentary: Switzerland: Not so Currency Neutral

Foreign Exchange - Morning Commentary
Switzerland: Not so Currency Neutral
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The latest version of the US Treasury’s Macroeconomic and Foreign Exchange Policies report (currency manipulator report) is now due with the potential for some trading partners to be hit with the manipulator label.  While the report is technically due, it should be noted that Treasury has been known to publish the report months after the due date.  This may be the case again especially in light of COVID-19 related issues.  

When it comes to currency manipulation, China garners many headlines, but it is Switzerland that runs the highest risk of being labeled a manipulator.  To be sure, China should remain on the monitoring list but should remain a non-manipulator.  Thailand and Taiwan are also at risk of a negative finding in the next report as estimates show both economies are likely to have pushed through the thresholds. 

However, recent acts put Switzerland in focus.  Earlier in the year, Switzerland was added to the Treasury’s watch list as the country broke through the threshold for both its current account and bilateral trade surplus.  More recently, COVID-19 driven shocks have led to the Swiss National Bank (SNB) stepping up its FX intervention to well beyond the US Treasury’s 2% of GDP threshold.  There are clearly mitigating circumstances that could warrant wiggle room, but from a mechanically quantitative point of view, this makes Switzerland a probable candidate for the manipulator label.  That the SNB has openly recommitted to intervention in order to achieve policy goals only adds to the manipulator label risk.  

Should Switzerland be labelled a manipulator, it will kick off a year long process of “enhanced bilateral engagement.”  The US will recommend ways that the Swiss could change its FX policy.  Most of the possible remedial actions under the US’s Trade Enforcement act are symbolic, but the possibility of a reassessment of the overall trading relationship is a credible threat under the Trump administration.  

For Switzerland’s part, the country is in a difficult position.  Unlike most countries with a large and persistent current account surplus, Switzerland lacks a natural private capital outflow.  Without the flexibility to persistently intervene, the CHF would likely face persistent appreciative pressure in order to bring external accounts back into balance.
  • US Q2 GDP dropped sharply by -32.9% on an annual basis.  This print follows up on a -5.0% drop the prior period.  While today’s Q2 GDP did beat the market consensus of a -34.5% decline, it still represents the worst GDP contraction since at least the 1940s.  Additionally, the labor market remains under pressure with initial jobless claims printing 1.43 million claims, up from last week’s print of 1.42 million claims. Initial jobless claims have now risen for two consecutive weeks. Continuing claims also rose to 17.0 million from 16.2 million.  
  • Equity markets are down around the world with risk sentiment turning negative.  Many of the same headwinds remain as illustrated by the Fed’s outlook on the economy.  For today, earnings will be a key point of focus as Apple, Amazon, Alphabet, and Facebook are all reporting after the bell.  
  • The FOMC kept its rate unchanged, as expected, and issued cautious outlook on the economy with the path forward extraordinarily uncertain.  The bank also reiterated that it is “not even thinking about thinking about raising rates.”  Chair Powell also indicated the bank should wrap up its framework review in the near future. 
  • German Q2 GDP dropped more than expected as it fell by -10.1% versus expectations for a  -9.0% decline.  Conversely, July unemployment claims fell -18.0K against expectations for a 41.0K increase. 
  • Japanese officials are considering plans to heighten restrictions in light of the spike in infections. On the economic front, the country reported strong retail sales with a 13.1% MoM rise versus expectations for an 8.0% increase.
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