Throughout his campaign and during the opening weeks of his presidency, Donald Trump has lashed out against countries that he believes are taking advantage of the strength of the US dollar relative to their currencies.
On the campaign trail, Trump promised that he would name China a currency manipulator on day one of his presidency.
Last week, he attacked Japan, stating, “You look at what China’s doing, you look at what Japan has done over the years. They play the money market, they play the devaluation market and we sit there like a bunch of dummies.”
Trump’s trade adviser, Peter Navarro, even took aim at Germany, saying the country was using a “grossly undervalued” euro to its advantage against other nations in the European Union and against the United States.
Interestingly, according to Deutsche Bank strategist Robin Winkler, none of those countries are the closest fit to being named a “currency manipulator” by the Treasury. Winkler believes that honour goes to Switzerland, which is the closest to meeting the three criteria needed before the Treasury can name someone a “currency manipulator.”
First, let’s review the requirements:
- A country must have a current account surplus of more than 3% of GDP.
- A country persistently intervenes in the foreign exchange market.
- A country must have a bilateral trade surplus with the US.
Switzerland is on the edge of fulfilling all three requirements, according to Winkler. The country is running a current account surplus of 10% and its intervention in the FX market accounts for 9.1% of GDP. The only category where Switzerland falls short is that it is currently running a $13 billion trade surplus versus the United States, and the threshold sits at $20 billion. However, Winkler believes that Switzerland will cross that mark as early as 2018.
While US trade with Switzerland is relatively small, any tariffs imposed by the US would have a profound impact on the Swiss economy. That’s because Switzerland sends about 10.6% of its exports to the United States, according to the CIA World Factbook, which Winkler says accounts for almost half of its net trade surplus.
Additionally, Winkler believes the 20% tariff that has been threatened by Trump would “put the same drag on the export sector as a hypothetical 8% appreciation of the TWI [Trade-Weighted Index].”
So what should the Swiss National Bank do to avoid the wrath Trump?
Winker thinks “the SNB letting EUR/CHF fall toward parity to avoid friction with the US may be the lesser evil for the Swiss export-oriented industry than incurring US retaliatory measures.”