Peter Navarro is Right: Germany Can be Labelled a Currency Manipulator

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Not for the first time this year, foreign exchange markets are once again being driven by politics.

A hallmark of Donald Trump’s young Presidency has been its sheer unpredictability, with a flood of executive orders catching global markets by surprise.

And as we know, surprises are what move currencies.

The President has certainly delivered on many of his campaign promises - save one. Labelling China a currency manipulator.

We believe there is good reason why he hasn’t - simply because China is no longer a currency manipulator.

Research shows that if anything, the Yuan is perhaps the most expensive currencies out there at present which in turn suggests China is actually losing valuable GDP growth as a result of its good being more expensive on the global marketplace than its economic fundamentals justify.

But that does not mean the words "currency manipulator" won’t pass through Trump's lips.

There is reason to believe that they might yet, and it could be that his target will be Germany.

The warning shots for such an unprecedented call were fired by Donald Trump’s trade adviser Peter Navarro when he told the FT that the Euro “grossly undervalued".

The adviser said on Tuesday, January 31 the Euro was an “implicit Deutsche Mark" that gave Germany a competitive advantage over its trade partners.

Navarro's gripe is that Germany is gaining undue benefit from a currency that is too low.

Germany is Having its Cake and Eating it

Navarro - an economics professor in another life - has spelled out a simple truth; that the Euro gives Germany a competitive advantage in global trade.

Could you imagine how much stronger the Euro would be were the likes of Greece, Spain and other peripheral states not in the Eurozone?

The Euro would be significantly higher were no sovereign debt crises and seemingly unlimited printing of Euros at the European Central Bank, aimed at keeping the Eurozone’s weaker members afloat?

Of course, it would be wrong to say that the desire to have these anchors on the currency are an intentional strategy, but the situation does help the mighty German economy which would otherwise command a stronger currency which would in turn dampen global demand for its exports.

The benefits derived from the weaker currency ensure it can pump exports into the global economy at discounted prices.

That is why Germany is able to enjoy the current account surplus it does - it exports more than it imports.

A recent report out this week has shown just how much the German economy is enjoying its weak currency as its current account surplus is expected to have hit a new record of $297 billion in 2016, overtaking that of China again to become the world's largest, the Munich-based Ifo economic institute said on Monday.

In 2015 the current account surplus stood at $271 billion.

This would be equivalent to 8.6% of total output, which means it would once again breach the European Commission's recommended upper threshold of 6 percent.

The Ifo, who compiled the report, went so far as branding Germany as the capital export world champion in 2016 with the USA branded the capital import champion.

This confirms a heavy bias in favour of Germany in USA-German trade relations, and Trump will take notice.

Germany Can be Called a Currency Manipulator

Indeed, by current rules, set out by the Obama administration, Germany could be called a currency manipulator.

Every year, the US Treasury Department conducts reviews in April and October to determine which country on the monitoring list will be named.

Analysts at Bank of America Merrill Lynch Global Research have looked into the matter and reported that China fails to meet 2 out of the 3 conditions named below, even though it is on the watch list together with 5 other economies - Japan, Germany, South Korea, Taiwan and Switzerland.

The three rules to being labelled a currency manipulator are:

  1. Bilateral trade surplus against the US above US$20bn.
  2. Current account surplus exceeds 3% of its GDP.
  3. Official FX purchases exceed 2% of its GDP.

The Euro is Undervalued

Another question markets will want answered is whether the Euro is undervalued?

By many studies, yes it is.

But there is one benchmark that matters more than others.

According to research by Deutsche Bank, in December the Euro was the world’s most undervalued major currency based on a FEER study.

FEER stands for Fundamental Equilibrium Exchange Rates (FEERs) - this is the exchange rate needed to ensure that the current account balance converges to a sustainable level over the medium term.

This is therefore a very relevant study when trying to gauge just how much a country is benefiting from an undervalued currency.


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