Analysts’ View: G20 make step forward on FX, no big leap

(BestGrowthStock) – The Group of 20 major economies vowed to avoid competitive currency devaluations and shifted more IMF power to emerging economies, taking steps analysts see as important to avert the risk of trade wars and promoting flexible exchange rates.

Following is reaction from analysts.

CARL B. WEINBERG, CHIEF ECONOMIST, HIGH FREQUENCY ECONOMICS, NEW YORK

“Yes, there was a realignment of voting rights and directors’ seats at the IMF, which is a big thing. But no monetary or fiscal measure, coordinated or otherwise, was implemented by the group…

“No coordination of policies is stipulated. No action with teeth is imposed on countries that may seek to restrict trade with tariffs. Currency markets are left as they were last week. Monetary and fiscal policies remain set according to national circumstances and local definitions of appropriateness…

“It will be hard for traders to come up with a sensible trade today based on what has come out of this meeting. It is also difficult to look ahead to the November G-20 Summit for common ground on which to base agreements that may help pull the world economy forward.”

GARETH BERRY, CURRENCY STRATEGIST, UBS, SINGAPORE

“The final communique shows all the signs of a weak compromise between competing interests. However, there was evidence of progress in some key areas and, given that the next G20 Summit is less than three weeks away, today’s agreement could be a stepping stone to enhanced global economic cooperation.

“Despite its many loopholes, the general pledge to avoid competitive devaluation probably reduces the risk of a trade war. As such, it should be broadly positive for risk appetite and would likely be supportive of the AUD, the CAD, the Nordics, and EM, all at the expense of the USD.

“In addition, there is a risk that USD/JPY and USD/KRW could encounter some further selling pressure if the market wishes to test allegiance to the anti-devaluation pledge.

THOMAS STOLPER, CHIEF CURRENCY STRATEGIST, GOLDMAN SACHS, LONDON

“The outcome of the G20 meeting clearly shows progress in the global rebalancing policy debate. In particular the FX relevant sections have become a lot more prominent and all the key issues have found some mention, including current account positions, protectionism, capital controls and exchange rate flexibility…

“At the same time, this is not a Plaza-style statement that signals a broad agreement on the role currencies have to play in the global rebalancing…

“We continue to think the speed of progress depends largely on how quickly key (Asia ex-Japan) countries realize that there are no other sustainable solutions to their problems — excessive reserve accumulation in particular — than FX appreciation. The G20 meeting was surely helpful in this broader process and there is plenty of goodwill, but it was not a great leap either.”

TODD ELMER, HEAD OF G10 FX STRATEGY ASIA EX-JAPAN, CITI, SINGAPORE:

“Today’s G20 communique fell well short of some market expectations for a Plaza-style accord to manage USD’s decline. Given that this outcome simply reinforces the status quo which has seen trend USD depreciation against a range of currencies and the likelihood that there remained some expectation for at least a toughening in rhetoric, this outcome should reinforce downward pressure on USD.

“This should be particularly true against freely floating currencies such as the EUR and AUD, with the latter enjoying the distinction of being the most liquid currency with tight links to China. We see less scope for JPY to appreciate in a continued USD decline given that the benign outcome from G20 may raise the risk for renewed intervention by Japan given that external opposition was not so virulent as to see significant discussion at the meeting.”

CHRIS TURNER, HEAD OF FX STRATEGY, ING COMMERCIAL BANKING, LONDON

“We suspect the market impact on Monday will be to see USD/Asia gap lower — and just as we have seen over the last eight weeks, USD-funded portfolio flows into Asia being recycled into the EUR as Asian FX reserve managers retain EUR weights of around 30 percent in their portfolios. We see the weekend developments supporting ‘risk-on’ sentiment — especially since the G20 also agreed to double the IMF’s $340 billion quota — and a continuation of recent trends which stand to drive EUR/USD substantially above 1.40.

Analysts’ View: G20 make step forward on FX, no big leap