Thursday, November 11, 2010

Forex: Will the G20 Meeting Even Matter?

G20 Seoul Summit 2010
Dollar Up Gold Down Today?

First, this Thursday morning market opening, we are seeing right now very possible low-risk high-reward trade setups on the US Dollar strength, and Gold Silver weakness. We will see what happens as the day progresses with the G20 meeting in focus.

Forex: Will the G20 Meeting Even Matter?

By Kathy Lien, Director of Currency Research

It has been once said that G20 meetings are not worth money that it costs to police them. The meeting which brings together the leaders of the world’s twenty most important industrialized countries has become nothing more than a media blitz used for political posturing. If you want real reform, you need to turn to the meeting of Finance Ministers and Central Bankers – the men and women who do the dirty work. The global recovery is bifurcated with emerging markets enjoying rapid growth while advanced nations underperform. In order to achieve a more balanced pattern of growth, the G20 countries need to stop acting like children by arguing and pointing fingers and start working together. Unfortunately based upon the pre-G20 disputes - the chance of this happening is slim. As a result, we do not expect the final statement to spark fireworks because the G20 will have a tough time agreeing on numerical targets for current account balances and which country(s) should be labeled currency manipulators. Although the fingers have been primarily pointed at China, the Federal Reserve’s recent move prompted some nations to accuse the U.S. of implementing policies that have given other countries no choice but to intervene in their currencies.

What’s on the Agenda?

The easy part of the G20 meeting will be the discussion on regulations. The Basel III rules that will toughen global capital and liquid requirements for banks will be heralded as a major achievement for financial stability. The leaders will agree to make sure there is a living will or plan to unwound “too big to fail” banks to avoid a big impact on the financial markets. They will also applaud themselves for committing to free trade and will pledge to avoid protectionism. However there will be little agreement on currencies and trade imbalances. According to the Wall Street Journal, the discussion on exchange rates between negotiators got extremely heated. Germany and China have previously accused the U.S. of driving down the dollar. The WSJ says that “At one point, a negotiator tried to insert language into the communiqué that could have been interpreted as a condemnation of the Fed's recent move, but it was quickly rejected.” The draft of the final statement said the G20 will “move towards more market-determined exchange-rate systems and enhance exchange-rate flexibility to reflect underlying economic fundamentals,” and will “refrain from competitive devaluation,” which is basically the same language used in the G20 Finance Ministers’ statement.

The U.S. will most likely back off their calls for current account limits after opposition from Germany and Japan. This morning, German Chancellor Angela Merkel said she will not support any quantitative targets. Prior to the G20 Finance Ministers and Central Bankers meeting, Treasury Secretary Geithner made the radical suggestion of asking all G20 nations to bring their current account imbalances to 4 percent of GDP by 2015. At the time, Japan screamed that setting a numerical target is unrealistic and Germany argued that they cannot engineer such a specific outcome. With a current account surplus at 6 percent of GDP, Germany is vehemently against the plan.

What’s Next?

Although the lack of progress could leave the foreign exchange market at a standstill, everyone knows what they need to do when they return home. The U.S. needs to engineer growth in a way that does not put the rest of the world at risk. China needs to boost domestic demand, appreciate its currency and narrow their trade gaps with other countries. According to last night’s trade report from China, the U.S. imported $25 billion and exported $7 billion to China. The process will be slow and gradual and will be helped by cooperation and not opposition. Treasury Secretary Geithner, Australian Treasurer Swan and Singapore Finance Minister Shanmugaratnam penned an op-ed piece in the Wall Street Journal today that laid out a new agenda for cooperation between G20 nations to achieve balanced and sustainable growth. They encouraged the emerging economies that are tightening policy to consider the rest of the world whose growth is still not strong enough to handle weaker demand. They also encouraged countries such as China, Brazil and India to reduce imbalances with other countries by shifting their economies away from exports and towards domestic demand. The third of their four points called on emerging economies to allow their exchange rates to reflect their substantial growth and to avoid protectionism. What we found most interesting is that this opinion piece was signed by both the Finance Minister of Singapore and the Treasurer of Australia – two countries whose alliances should be gradually shifting towards China and away from the U.S. given their hypersensitivity to Chinese growth. Perhaps they will have better sway with China than the U.S. who has only let their tensions with the Asian giant become more heated in recent months.

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