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MACROECONOMICS


preemptively turn more aggressive even when the new president provides more details of his fiscal intentions. It is only prudent and practical to see what is eventually negotiated, and when it is implemented. If the


economy is


going through a soft patch, for example, as it appears to have exited near midyear, the fiscal stimulus could be delivered at an opportune time.


currency manipulator, bilateral talks must be held, and US companies can sue for damages. Under direction from Congress, the US Treasury has developed a quantifiable definition of manipulation. China has not met


FX


and suggestive of the immense capital outflows it is experiencing. If Chinese officials were to step away and let the market determine the exchange rate, which the G7 and G20 have endorsed, the yuan would likely fall fast and furious.


On the


other hand, if the unemployment rate is threatening to fall below 4%, the


economy is


growing above trend, and prices are accelerating, a different response may be necessary.


China


As a candidate, Trump, like Obama and Bush before him, threatened to cite China as a currency market manipulator on day one.


Indeed,


the indication is that currency and trade will be the first priority of the new administration, with taxes and infrastructure spending addressed later on.


Recall that if China is judged to be a For long-term investors, the


it. Neither Obama nor any other president before him for over twenty years has formally declared China to be a manipulator. Any reasonable definition of currency manipulation that can be applied to China would likely apply to many other countries.


It is true that China has been intervening in the foreign exchange market, but it is to strengthen not weaken the currency. Te more than one trillion dollars in reserves that the central bank has drawn down is reflective


European outlook is particularly concerning


Later it would intensify trade tensions, as the products of China’s vast excess capacity would export. At the end of 2016, the US placed anti- dumping duties on Chinese- made washing machines and opened a new investig ation into plywood i m po rt s


from China. Both China and the US (and nearly every other country) are members of the World Trade Organization. Te rules are established, and there is a conflict resolution mechanism. Clearly, the risk is that the Sino-American relationship is tested in the period ahead, but


particularly robust.


Chinese politics will also be important next year. Tere is no need to confuse politics and political parties. China


FX TRADER MAGAZINE January - March 2017 17


the status quo is not


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