- G7 Finance ministers and central bankers - plus representatives from Russia, the IMF and OECD - gather in Rome Friday; foreign exchange issues are expected to feature in discussions over the next few days though we do not expect significant new language on currencies to be introduced to the communiqué, which should be issued Friday afternoon local time (watch for early leaks over the course of the day). Meeting on Friday 13th is hardly auspicious and although protectionist sentiment (the proposed “Buy America” provision in the US stimulus package, French state aid for domestic car manufacturers etc.) is simmering on many fronts, the discussions should be a little more convivial than recent meetings; officials have indicated in media briefings that the Bush administration seemed perhaps less than fully engaged in such multi-lateral meetings and hope for something better under President Obama’s team. Above (recent) average efforts to reach a consensus seem possible.
- If we expect a basic reiteration of the early October communiqué - stressing the usual concern about excessive volatility and disorderly movements in currencies - the case for a special reference to Japan and the JPY remains rather strong on the face of it. The G7 issued a special communiqué on October 27th which referred specifically to “excessive JPY volatility”; the JPY has strengthened further on a trade weighted basis since then and the Japanese economy has weakened earlier and more rapidly than elsewhere. Japan’s Q4 GDP data, due to be released Sunday, is widely expected to show a plunge in overall activity (the range of expectations is -10/-14% annualized for the quarter). Still, in the interests of maintaining a united front against nascent protectionism and competitive devaluation pressures, Japan may be willing to let specific mention of the JPY drop. It can always address sharp JPY gains unilaterally back home. Europe’s concerns about the GBP look to have some merit by the measure of recent trade-weighted trends, with the pound falling around 20% over the past few months. However, worries about the pound may be specific to one or two countries at most and we would not expect the pound’s weakness to draw general concern.
- Acknowledging Japan’s predicament could also complicate the G7’s - and in particular the new US Administration’s - approach to China; although Mr Geithner stuck the “manipulator” tag on China in his confirmation hearings, Washington has since cooled off a little on the issue may not want to pre-empt its position one way or the other before the spring release of the Treasury’s next FX report. Sticking with the tone of the October statement (”…Given China’s important role in the global economy we encourage the authorities to allow accelerated appreciation of the RMB effective exchange rate as a means of further rebalancing of the domestic economy and promoting external stability”) may once again be appropriate.
- It seems more likely that the first synchronized global slowdown in fifty years, the credit crunch and repairing the global financial infrastructure should have a higher priority than currency issues for policy makers this weekend. Many countries may prefer a soft or softer exchange rate but achieving that is a different matter and perhaps pointless in the grander scheme of things. By some obvious - and some esoteric - measures, global trade flows have collapsed in the past few months as demand slumped. Most major economies are in recession - or close to it - and while it could be tempting for one or another country to give the exchange rate a nudge lower to gain a short term advantage, it seems fairly obvious that the real problem is the profound weakness in global demand, which competitive devaluations cannot address.
G7 - Bigger issues than FX should dominate deliberations and statement
February 13th, 2009 · No Comments
Tags: Forex News
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