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
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"Refrain" is well understood. The key work in that statement was "should".
ReplyDeleteYancy, I looked it up and one meaning of refrain is, "avoid doing". That may be clear to some but there is a lot of wiggle room from avoid to a more affirmative, "Will not do"
ReplyDeleteKind of like an OPEC meeting. Everyone agrees on quotas, shakes hands and then does exactly what's in their best interests - pump oil.
ReplyDeletePrisoner's dilemma equilibrium.
I can't see the dollar declining much further on this go-round...the U.S. is no longer quite the essential lynch-pin of world trade it once was and does anyone really think the yen or euro or AUD are UNDERVALUED?
ReplyDeleteBruce,
ReplyDeleteI am puzzled by what you meant by "Ayn Rand utopian economics" in "Tim G went to Korea trying to sell a plan to limit external deficits to 4%" -- I was able to see no connection. Care to elaborate your point?
JN
" Why is this man smirking smiling?"
ReplyDeleteBecauses he's a dick, a sociopath
JN,
ReplyDeleteAbout a dozen readers at different sites have taken me to task on the Ayn Rand comment. AR did believe in what I refer to utopian economics. In the case at point she would have believed that the collective best interest would have forced the right decision of minimizing external deficits.
Tim went to Korea with a plan that said, "Hey, this would be good for all of us!" It had no chance of selling.
But this link is weak and I admit it. AR would not have advocated manipulating FX rates.
I will lay off AR in the future......
"The Dollar is our Currency, but Your Problem"
ReplyDeleteUS Treasury secretary John Connally to a delegation of European finance ministers in 1971
"I got some ideas on Mr. Connally. He ain't never done nothin' but get shot in Dallas."
Bob Bulloch Texas Secretary of State 1972
"Now, in my State of the Union address I set a goal of doubling America’s exports over the next five years."
Barack Obama March 11, 2010
Beggar-thy-neighbor:
A devaluation that is designed to cheapen a nation's currency and thereby increase its exports at other countries' expense and reduce imports. Such devaluations often lead to trade wars.
"There is the possibility... that after the rate of interest has fallen to a certain level, liquidity preference is virtually absolute in the sense that almost everyone prefers cash to holding a debt at so low a rate of interest. In this event, the monetary authority would have lost effective control."
John Maynard Keynes, The General Theory
http://fatboysez.blogspot.com/2010/10/beggar-thy-neighbor-or-good-fences-make.html