By Michael O’Neill

The US Department of the Treasury declared war on Switzerland.  Well, not exactly war, but they called them a “currency manipulator.”

In the “highfalutin” world of global trade, it is akin to a slap across the face with a glove which used to presage a duel in the 18 and 19th centuries.

Switzerland raised the ire of Uncle Sam because it fulfilled the three key requirements needed to be tagged Currency Manipulator.  According to “The Omnibus Trade and Competitiveness Act of 1988” a currency manipulator is a country that meets all of the following criteria over a twelve-month period:

 1) a significant bilateral trade surplus with the US of over $20 billion.

2) a material current account surplus of at least 2% of GDP. 

3) persistent, one-side intervention when net purchases of foreign currency are conducted repeatedly and total at least 2% of GDP.   Viet Nam was also named a currency manipulator.

Now what?  Actually, not much.  The declaration of currency manipulator is all bark, no tree.  Congress has to go through a convoluted process to determine remedies, and there is a debate raging as to the legality of using the primary remedy, countervailing duties (tariffs).

Treasury is not overly thrilled with the currency practices of other US trading counterparts.  They are now monitoring China, Japan, Korea, Germany, Italy, Singapore, Malaysia, Taiwan, Thailand, and India, who represent over 35% of total US trade.

Those countries could argue rather strenuously that it is the United States of America that is manipulating its currency.  They wouldn’t be wrong.  The US government budget deficit for 2020 is over $3.3 trillion and expected to rise in 2021, while the Fed keeps interest rates at record lows.  Historically, huge budget deficits and low interest rates equate to a weaker currency.,

The Federal Open Market Committee (FOMC) may not be verbally undermining the US dollar.  However, promising to leave interest rates at extremely low levels until there is “substantial further progress” accomplishes the same thing.

The FOMC reinforced that message on December 16.  They left interest rates unchanged at 0.0-0.25%.  They said they would stay at that level “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”  Yada, yada, yada.

Some would say that  the Fed’s promise of low rates until at least 2023 combined with a $120 billion per month quantitative easing program is a stealth devaluation of the US dollar.

However, that argument doesn’t hold water in the case of the Canadian dollar.

The Bank of Canada and the Fed monetary policies more or less mirror each other.

Canadian interest rates are at record lows and the BoC said they would stay that way until the inflation objective is achieved.  The Canadian government budget deficit is forecast to surpass $400 billion in 2021.  In many regions across the country, the second-wave COVID-19 pandemic led to the reimposition of strict measures to combat the spread.  Small retailers, and everything else determined to be non-essential has been ordered to close; social gatherings are not recommended.  The rules are convoluted, complicated, and in many cases, inane.    Hardly a reason to buy Canadian dollars.  Yet that’s what is happening.

The US dollar is being sold, not because of monstrous budget deficits, an ultra-low monetary policy, or soaring numbers of new coronavirus cases, but because of hopes for a robust economic rebound in 2021.  That’s bizarre.  If the global economy is booming, why sell US dollars?   America is the largest consumer economy in the world and if there is economic boom, the USA will lead the charge.

Meanwhile, USDCAD is probing levels last seen in 2018 despite the economy being in recession,  record high budget deficits, and new carbon tax hikes, and all occurring in the middle of a pandemic.  That’s even more bizarre.

Perhaps the US dollar sellers should pay heed to comments from Bank of Canada Governor Tiff Macklem and Fed Chair Jerome Powell.

Bank of Canada Governor Tiff Macklem warned an audience at the  Vancouver Board of Trade on December 15, saying “the economic recovery from the pandemic is at a very difficult stage.  Near term, rising COVID-19 infections will dampen growth and could even deepen our economic hole.  Uncertainty is elevated, and the recovery is going to be long and choppy.” 

The FOMC monetary policy statement said, “The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

A fake currency war will be the least of the worries for FX trader’s if the anticipated robust 2021 economic recovery fails to materialize.  Instead, they will be chanting “ One-Two-Three Four-What were we selling US Dollars For?”