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Thursday September 24, 2009 - 16:06:32 GMT
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Forex Blog - G20 - A Lesson in Dysfunction

G20 - A Lesson in Dysfunction
I have G7 bias…I was weaned on currency accords and coordinated rate changes…G7 believe it or not at one time mattered. After every G7 meeting which almost always ended on a Saturday, I was in the office busily working on the outcome and fielding calls from literally a dozen reporters…some way to spend a fall an spring weekend.  Fortunately G7 was only twice a year outside of the odd emergency meeting. 
On G7-meeting weekends now I go fishing, no reporters call and writing up summaries of G7 for the most part is pointless…there is no news.
For someone always looking for a trade idea to push to clients, I invariably (want to believe) think that maybe this G7/G20 meeting will actually prove newsworthy and move markets only to be reminded by the reality of the utter insignificance this body has devolved into.  Don’t get me wrong the Baker versus Buba row was an element in prompting the stock market crash of 1987 and this body has always suffered from infighting, domestic agendas at odds with multilateral agendas and an absence of urgency (crises are rare events, even if the fuel for cooperation).
What is most disappointing is that G20 heads of state gather today and tomorrow in Pittsburgh at a time when the world economy is just exiting its worst downturn since the Great Depression with a handicapped banking system and little driving growth from the private sector.  It may not be crisis time but many of the issues the crisis revealed (naked swimmers after the tide goes out) remain unaddressed.  European banks at best have a checkered record in reducing leverage, writing down bad assets and boosting capital (UK something of an exception).  With fiscal stimulus driving something of a rebound in global trade, the USD is declining at a steady clip and not far from year ago record lows (USD index) which is great for the US (no inflation) but pretty unacceptable to some export-driven economies like Japan and Euro Zone.  Sarkozy and Merkel (and their aides) hope to bring up the USD at G20 as the EUR rise has raised alarms (GBP is sinking like a stone versus EUR as well).  Japan’s new government has said it will do less about a strong yen, but even this view has been reined in by officials surely after major exporters registered complaints.  China meanwhile is stewing over US sanctions on tire imports and is still calling for an alternative to the USD for a reserve currency (PBOC official has a paper today on this topic on G20 website).  As banker to the US China is concerned that the US is on a devaluation road (CNY deval too given peg and where inflation is far greater risk than US) and with over $2trln in reserves, which $1.4trln is though in USD (over $700bln in US Tsys), China has every reason to be worried.  But no one made China fund the US deficits.  China chose to peg its currency versus the USD.  China went all in with its USD hand and is asking for a redeal…that ain’t Texas hold-em that is Texas stole-em.  And the US is quite happy with an orderly decline in the USD and if not we would have seen some verbal protests from the likes of Geithner and Summers. Why should they with the state of domestic consumption more permanently lowered, low inflation (sorry for repetition) and need for sources of growth outside of domestic fiscal stimulus?  Obama is bringing a grand proposal for addressing imbalances (ultimately the source of the credit crisis (cheap money chasing too few assets).  His solution?  The US saves more and ROW spends more.  That is about as tired a notion as G20 gatherings holding great significance for markets.  Oh this time is will be pinned down with the IMF overseeing the adjustment process and will apply some yardstick to measure progress.  And if a country does not measure up to milestones they will face public humiliation be being warned by the IMF…now that is some motivation.
Then there is the question of financial regulatory reform…a year after the crisis and now significant new regulatory rules are in place anywhere much more coordinated across borders.  France and Germany want to start with bank bonuses (compensation)…which is really food for the masses…let them eat the heads of bankers since we have no cake. Merkel surely needs some lift from G20 ahead of the general election and Sarkozy needs to make a splash so he appears in the French press ahead of his wife.  Obama is pushing for raising capital standards (US banks have done some of this already whereas continental European banks have done very little) and this will force lower leverage and lower comp.  Sarkozy has said he will take his baguette and walk out if there is no agreement on capping banker comp.  Nice one Speedy.
Lastly there is a move afoot to try and coordinate an exit strategy from unconventional and conventional monetary policy to ensure a sustainable (private-sector led) growth and reduce volatility in capita markets.  Some central bankers are pushing to coordinate interest rate hikes on the way up to prevent potential for mayhem in asset prices and FX.  But one has to wonder if there is any sense of urgency now that the global economy is returning to growth if hobbled.  And how concerned would the ECB be if the Fed and BOE started to hike rates before the ECB if it meant a higher dollar (assuming the risk aversion motivation disappears)?  ECB might delay a hike until after the Fed for the very reason to keep EURUSD gains in check.  Low odds on coordinated rate hikes ahead are a safe assumption, but it is worth watching this debate ahead.
I have some fishing to do in the next few days and I am confident there will be little reason to come off the water early to respond to the press briefings and communiqué.  And my guess is my cell phone will not be ringing with reporters eager for a quote on what G20 means for the dollar.
David Gilmore


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