The G20 was a predictable dud. Our boy Tim G went to Korea trying to sell a plan to limit external deficits to 4%. This was Ayn Rand utopian economics that does not work in real life so all the other ministers said “No thanks“.
There was talk in the final communiqué that currencies should not be manipulated. That was just talk. I love it when they use words like “refrain“. What does that exactly mean?
“Countries should refrain from competitive devaluation of currencies”
The real comment on currencies came from Yoshida Noda, Japan’s finance minister:
“A prolonged appreciation in the yen is not good for Japan’s economy. Our stance, that we will take appropriate, bold action if needed, is unchanged.”
That sounds like fighting words to me. So much for peace and love from the G20. But what does “If needed” really mean?
Since nothing happened this weekend the question is how is the FX market going to read it? The logical reaction to a status quo G20 is for status quo FX action. Generally speaking that means a weak dollar play. I would not be surprised to see USDJPY trade below 81.00. The Euro will try to catch a bid over 1.40.
So we have an interesting test of the market in front of us. Do we take another big leg down in the dollar? Or does the market just try to do that and back away?
I weak dollar move would be a “risk on” market. One thing fighting against the weak dollar story is that I see little evidence that the rest of the market actually wants to take more risk on. The tail is wagging, but the dog is not.
One thing I thought was interesting from the statement:
The United States and Britain, both with large deficits, agreed to be “vigilant against excess volatility and disorderly movements in exchange rates.”
That is new. It does not mean much as the adjustments taking place have largely been orderly. It does open the door for coordinated intervention should things actually become disorderly. This statement is most certainly a measure of what the G 20 ministers are worried about. Their worst fear? A run on the dollar. The catalyst for a run would come from Bernanke. The German finance minister made that clear:
“I tried to make clear that I regard that (QE-2) as the wrong way to go. An excessive, permanent increase in money is, in my view, an indirect manipulation of the exchange rate.”
I wonder if Bernanke even listens to this. He probably spent his Sunday looking over a textbook on the depression. Why is this man smirking smiling?