By Saikat Chatterjee, John Revill and David Lawder
LONDON/ZURICH/WASHINGTON (Reuters) - The threat of being named a currency manipulator by the U.S. Treasury may be an embarrassment for Switzerland, but even if the country does get the tag, it likely will have little effect on the Swiss National Bank's monetary policy.
Switzerland is expected to meet all three criteria for such designation in the long-overdue U.S. Treasury report on the foreign currency practices of major trading partners. The Treasury has some discretion on whether to issue such a label, and the coronavirus pandemic, which has thrown trade and capital flows into chaos this year, could be a factor.
There would be no automatic punishment with a label, though U.S. law requires Washington to demand negotiations with designated countries.
Vietnam, Thailand and Taiwan this year have also been in violation https://www.cfr.org/article/tracking-currency-manipulation of the Treasury's three manipulation criteria: a $20 billion-plus bilateral trade surplus with the United States, foreign currency intervention exceeding 2% of GDP and a global current account surplus exceeding 2% of GDP.
Currency experts expect Treasury Secretary Steven Mnuchin to issue the report within days, just over a month before he leaves office.
“The subtle implication of being put on this list is that you eventually could come under sanctions, and that puts pressure on these countries not to weaken their currencies so much, or to allow strengthening,” said Win Thin, global head of Currency Strategy at BBH.
But he said that in Switzerland’s case, as the exchange rate is its main tool for fighting deflation, "they may say, ‘Well, tough’”.
The Swiss central bank is firmly under the Treasury's focus after spending 90 billion Swiss francs ($101.50 billion) on foreign currency intervention in the first half of 2020 amid pandemic-driven safe-haven inflows.
The SNB has long argued it is not trying to weaken the franc to gain a trade advantage. Instead, it aims only to stem the appreciation of its currency to head off the threat of deflation, which runs contrary to its goal of price stability.
“Switzerland has always been treated as a special case when it comes to exchange rate policy and even the U.S. Treasury has conceded in the past that Switzerland’s economic situation is “distinctive” and that its monetary policy options are limited by its small stock of domestic assets,” said David Oxley, a senior European economist at Capital Economics.
Latest data shows the SNB has dialled back on its interventionist approach. Despite the interventions, the franc is considered among the most over-valued major currencies in the world, according to various trade-weighted indexes.
International Monetary Fund staff estimated https://www.imf.org/en/Publications/ESR/Issues/2020/07/28/2020-external-sector-report in August that the franc was over-valued by 13.5% to 19.7% during 2019.
If named, Switzerland would be the first to get the tag since China in 2019, at the height of U.S.-China trade tensions. That tag was removed in January as Washington and Beijing signed a trade agreement, citing a rebound in the yuan.
The SNB, which is to give its latest monetary policy decision on Thursday, declined to comment.
(GRAPHIC: FX valuations - https://fingfx.thomsonreuters.com/gfx/mkt/xlbpgmlbepq/FX%20valuations.JPG)
NOT BIDEN'S PROBLEM
The SNB's readiness to intervene in currency markets remains central to its approach under Chairman Thomas Jordan.
SNB officials have long tried to explain their situation to Washington, noting that the franc rises because of global pressures. As a small open economy, Switzerland can do little about that.
They will likely be hoping for a more sympathetic hearing under the incoming administration of President-elect Joe Biden.
"Switzerland being named as a currency manipulator by the U.S. Treasury will not gather the same market attention under the new Biden administration as compared to a Trump one," said Kaspar Hense, a portfolio manager at Bluebay Asset Management in London.
That confidence is also reflected in the currency markets.
Short term, Morgan Stanley (NYSE:MS)'s position tracker, which measures currency flows on its trading platforms, show hedge funds remain broadly bullish on the Swiss franc.
But medium term, currency derivative markets appear to be neutral about its prospects. Risk reversals, which show the ratio of calls to puts on the franc, show bets on further franc gains over three to six months broadly subdued.
BBH's Thin said any decision under the current U.S. administration may not matter. The new Treasury secretary "can come in and say ‘I don’t even believe in this,'” he said.
(GRAPHIC: SNB FX intervention - https://fingfx.thomsonreuters.com/gfx/mkt/rlgpdqonyvo/SNB%20FX%20intervention.JPG)