US View: FXWW

From the FXWW Chatroom – The US administration’s strategy to deal with the perceived economic ailment of a persistent US trade deficit has become an increasingly dominant element in financial market fortunes, not
least for the FX market. The aim of this report is not to debate the merits of President Trump’s
discomfort with the US trade deficit. Instead, we aim to illuminate the FX implications of one
step among many being taken by the US administration to try and treat this imbalance – the
inclusion of currency stability clauses within newly negotiated trade deals.
The US is fighting its trade war on many fronts so if currency clauses were to become a
common element within future trade deals, it could change the dynamic for a big portion
of the FX market. After all, the US is seeking fresh trade agreements with China, Japan, and
the EU among others. It has already embedded a currency clause within the newly negotiated
USMCA trade deal with Canada and Mexico. President Trump has also indicated he would seek
to reach a new trade deal with the UK after Brexit. Together, these currencies account for 80%
of FX turnover according to BIS data.
In aggregate, therefore, currency clauses in these trade deals would imply an agreement
among policymakers to alter how much of the currency market operates. It brings to mind the
Plaza and Louvre accords of the 1980s, previous “global” FX agreements that sought to
engineer a path for exchange rates beyond the normal forces of market supply and demand.
Policymakers sought to become the dominant determinant of exchange rates.

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