FX COLUMN-G20 cools trade war risk, outcome positive for risk

— John Noonan is head of Asia FX at IFR Markets. The views
expressed are his own —

By John Noonan

SYDNEY, Oct 24 (BestGrowthStock) – It would be easy to focus on
what the G20 meeting of finance chiefs did not accomplish, but
in fact the communique showed a broad agreement on balancing
the global economy that should be positive for risk assets and
Asian currencies.

What was missing: ministers did not agree to any firm
targets for reducing trade imbalances, as proposed by the
United States, and no major initiatives were undertaken on
currency values despite all the talk of a Plaza Accord-type
agreement beforehand.

But the language in the final communique was the strongest
yet from the G20 and emphasised the need to move towards
“market determined” FX rates rather than “market oriented,” as
was prescribed in previous G20 communiques.

Despite the failure to agree to firm targets or timetables
— the meeting in South Korea was successful in setting a broad
framework and starting point for future cooperation in setting
specific goals aimed at avoiding currency and trade wars.

Markets on Monday may view the development as positive for
Asia ex-Japan currencies, and the step away from the brink of a
currency war should be positive for risk currencies and risk
assets broadly.

The G20 is not a clear-cut negative for the dollar (.DXY: )
since the United States may bow to pressure against aggressive
quantitative easing, potentially giving it some relief against
the euro (EUR=: ) and other major currencies even if the USD
succumbs against Asian currencies.

Perhaps the most positive outcome from the G20 gathering of
finance ministers was the agreement to give developing nations
a larger representation at the IMF and more voice in IMF
policy.

Analysts believe that by getting more representation at the
IMF, developing nations would be less likely to act selfishly
and irresponsibly in regard to currency and trade issues.

While strains between some of the G20 members linger, the
meeting avoided a chaotic end and widening of the gulf between
developing nations and the G7.

The worst case scenario coming into the meeting was it
ending in a free-for-all and the G20 losing credibility.

That did not happen. There seemed to be a spirit of
agreement resulting from the gathering and there is some hope
the G20 leaders meeting in Seoul in November might be able to
agree to firm, but non-binding, current account targets.

The New York Times stated there was “more consensus than
many officials had expected” for the largely U.S. agenda, but
the U.S. probably came in for at least as much criticism as
China throughout the meeting and in the communique.

The ultra-loose Fed monetary policy was a point of
contention for developing nations before the meeting, as they
claimed U.S. monetary policy was directly debasing the value of
the USD — resulting in undesirable waves of foreign investment
flow into the growing emerging market countries.

The developing countries had an ally in Germany at the G20.
German economy minister, Rainer Bruderle, warned that
“excessive, permanent money creation in my opinion is an
indirect manipulation of an exchange rate.”

The market was not expecting firm targets or a hallmark
agreement after the weekend’s G20, nor were they expecting the
meeting to end in fractious discord between the currency
interveners and the money printers.

The consensus on Friday was the G20 would end without
accomplishing very much and just a bunch of motherhood
statements to paper over the cracks developing across its
membership.

While the sceptics will maintain that still might be the
case, the more balanced view is the G20 meeting did take some
baby steps in the right direction and the world is further away
from currency and trade wars than it was a few days ago.

(Editing by Eric Burroughs)

FX COLUMN-G20 cools trade war risk, outcome positive for risk