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The US Treasury Department is expected to release its report on the “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States” in coming days and this year, markets will likely be particularly focussed on the report because of ongoing Sino-US trade tensions and RMB depreciation this year (YTD -6.1% against USD), suggests the research team at Nomura.

Key Quotes

“Recent reports suggest the Trump administration has been unhappy with the RMB depreciation and President Trump has, in the past, expressed his view that a number of US trading partners manipulate their currencies.”

“We believe that, even if the US Treasury were to adjust its criteria so that China can be labelled a currency manipulator, the impact on RMB would be limited.”

“For the rest of Asia, a change in the criteria in order to label China and/or increase the list of countries considered a “Major Trading Partner” by the US would have significant implications.”

“It is unclear which criteria would be used/changed and which countries would also fall into the FX manipulator camp, but we see the risks as highest for Thailand, Malaysia, South Korea and Singapore, given that these countries have broken either two or two of the current FX manipulation criteria. We view Thailand as at the highest risk of being labelled, especially if the US expands its monitoring list to the 21 top trading partners or beyond.”

“In a scenario where Thailand is labelled a currency manipulator, we believe BOT USD buying intervention would drop materially, likely resulting in strong gains in THB – especially once global factors become more conducive for EM.”