What could a US-China currency deal look like?

Whether or not either side is prepared to accept a partial trade deal remains to be seen, but one suggestion emerging today is that any partial deal could involve a currency agreement. This had been mooted back in April by US Treasury Steven Mnuchin, but few details were provided at the time.

However, there is speculation that the FX language used in the partially ratified USMCA provides the blue-print for any US-China trade deal. This basically borrows the wording from G20 FX Communiques that parties should ‘avoid manipulating exchange rates or preventing effective balance of payments adjustment for trade gains’.

Of most interest here is the need for public and regular reporting of international reserves and most importantly FX intervention. Here the US Treasury’s semi-annual FX report has long focused on Asian nations preventing exactly those balance of payment adjustments – primarily by preventing their currencies appreciating in a dollar bear trend. Full disclosure of FX intervention figures could discourage Asian nations from keeping their currencies artificially weak.

As an aside, Korea has for the first time this year started reporting FX intervention data – reporting half-year activity in aggregate with a three month lag. Incidentally, Korea sold $187mn of FX reserves in 2H18 and another $3.8bn in 1H19.