Currency Wars Over?
The prospect of additional QE from the Federal Reserve has been the single dominating feature of the last couple of months it seems for the FX markets, with almost every movement attributable at some stage to speculation over the likelihood of the printing presses being wound into action again in the US. Therefore the G20 meeting over the weekend offered a pleasant change of scenery for FX markets to focus on, with exchange rates, their relationship with trade imbalances and central bank currency intervention high on the agenda. The agreement reached by the G20 financial leaders, with less specifics, is that these nations would “move toward more market-determined exchange rate systems that reflect underlying economic fundamentals.” The G20 group also agreed to “refrain from competitive devaluation of currencies.” US Treasury Secretary Geithner, however, was seeking an accord limiting the surplus or deficit on current accounts to less than 4 percent of gross domestic product in the next five years. Current accounts is a broad measure of foreign investment and import/ export balances.
On the bigger picture, the meeting acknowledged several broad observations, the brief conclusion of which is that, whilst the global recovery continues to advance, it is hugely fragmented, the pace of the upturn differing markedly from region to region, and country to country. Significantly, there is a clear divide between emerging market economies, which are racing ahead, and their more developed counterparts where growth is stagnated at best. Indeed, Treasury Secretary Geithner alluded to his desire for dialogue of the sort seen this weekend on the basis that, in previous times, international discussion on such issues was dominated by the US, Japan and Europe. The picture has changed now, and the impact on currency markets by nations such as China, Brazil, India etc is now hugely significant, and as such their input is valid to say the least.
For the UK the key release of the week is tomorrow’s GDP for the third quarter. At the time of the August Inflation Report the MPC collectively were pencilling a GDP growth rate of around 0.5% in Q3. On the data outturns since then it seems to remain a sensible forecast. But should the figures come in much weaker (say 0.2-0.3%) then that arguably will put November’s meeting at least ‘in play’ for a QE extension.