G20 Finance Ministers and Central Bankers are gathering in Korea right now talking about currencies. There has been a lot of speculation about whether or not a statement will released on Saturday that show a unified view on currencies. In my article G20 Wildcard, I wrote extensively about the possible language that the G20 could agree on and other topics that are being debated at the meeting as we speak.
However as currency traders, what we really care about is how it impacts currencies. The following monthly chart shows how the EUR/USD traded after the G7 changed the language in the currency portion of their communique (fancy word for official statement). This will be the first G20 statement on currencies because in the past, these big announcements would be made at the G7/G8 meetings. As you can see in the chart, the language changes have marked both short and long term tops in the EUR/USD. Since this is a monthly chart, even the small reversals have been more than 1000 pips or roughly to 7 to 10 percent.
Any coordinated message on currencies will look more like the Plaza Accord, which was aimed at weakening the dollar than the Louvre Accord which supported it.
Take a look at how the EUR/USD traded after the G7 changed the currency portion of their communique:
The Wall Street Journal has some great G20 graphics comparing how much stimulus the countries have announced, the current and projected outlook for GDP, as well as the degree of CPI and debt. Definitely check it out. Click on the image to access the interactive charts:
This morning, the Financial Times released a draft of the G20 communique or “statement” that will be unveiled on Thursday (below). It contained no new fiscal stimulus or comment on currencies.
This exacerbated the rally in the U.S. dollar which was already shooting higher on the fear of GM or Chrysler bankruptcy. Trouble in the auto sector is weighing heavily on the market as the U.S. government moves to overhaul the automakers. Top that off with strong repatriation related demand for the Japanese Yen and it helps to understand why the best performing currencies today are the U.S. dollar and Japanese Yen. On Friday, we talked about how the EUR/USD is on its way to 1.31. We came very close to that level this morning (19 pips to be specific). With no relief in sight, there is a good chance that we could see the currency pair test and break that level once again.
U.S. Dollar Performance
G20 draft communiqué
Copyright The Financial Times Limited 2009
Published: March 29 2009 19:43 | Last updated: March 29 2009 19:43
Signs of stability in the US manufacturing sector has failed to turn around the market’s risk appetite. Although the US dollar has weakened marginally against all of the major currencies, if US stocks continue to sell off, we could see the dollar regain strength.
Will the US government allow GM to fail?
The fate of General Motors will be the biggest event risk until the end of the month. In my opinion, the US government will not allow GM to fail. President elect Barack Obama has already pledged on numerous occasions to support the auto and retooling industry. To back off his promises so early in the game would be a reputation killer and not something the world expects from Obama. House Speaker Nancy Pelosi has also called on Congress to pass an emergency rescue package for the industry. Given that 1 in 10 jobs in America deals with the auto industry (from dealerships, auto parts etc), there is no question that the US government will extend life support to General Motors.
Nonetheless the longer the US government stalls, the more strain it puts on the financial markets, because investors don’t like uncertainty.
G20 Holding Out for Obama
The G20 meeting this weekend was also a big disappointment. With slightly more than 2 months to go before the US Administration changes, this was hardly a surprise because President Bush was not expected to commit his successor Barack Obama to any initiatives that he does not support. Since the group set an action plan for March 31 and another meeting for April 30, the G20 is clearly waiting for directions from Obama’s new Administration before putting the pedal to the mdeal. . The only problem is, the global economy may not be able to wait that long.
Recession Trades Still On