Today marks the start of the G-20 meeting where world economic leaders have gathered to discuss how to improve the global economy. It has already been leaked that Secretary Geithner had sent a letter to the leaders asking them to consider putting “caps” on their account surpluses. This is obviously aimed at China, and is already being met with opposition. This would also call for those countries with surpluses to allow their currency to strengthen against the Dollar, which is seemingly a contradiction to what he said earlier this week about the Dollar not needing to go lower. Surprise!
The major problem is that the US no longer carries the economic power to affect the changes that need to be done, despite being the world’s largest economy and having the world’s reserve currency. Much of the discussions at this meeting are intended to produce a “cease fire” in the currency war that has everyone trying to race to the bottom. However, I don’t see an immediate resolution coming about from this meeting, though policies could change going forward.
Aside from this, there is not a lot of news this morning that would drive currency markets one way or another. Overnight equity markets are mixed, and US stock futures are set to open higher. As mentioned yesterday, US corporate earnings have been good, but have come as a result of cost-cutting and labor reduction.
In the Euro zone, German Business confidence figures came in better than expected as the German economy is firing on all cylinders. But will it be enough to support the entire EU?
In Canada, CPI figures came out largely in line with expectations and there was a pick-up in retail sales.
So this morning we are seeing some mild risk appetite, though the market may pare back ahead of the weekend as the uncertainty of the G-20 meeting leaves investors slightly cautious.
In the forex market:
Aussie (AUD): The Aussie is higher on risk taking as the market is seeing the Geithner letter as an excuse to sell the Dollar. Stocks in Asia were higher overnight also supporting the Aussie.
Kiwi (NZD): The Kiwi is higher for the same reasons as the Aussie, and the big news out of New Zealand is that the country may lose the production of a movie from the “Lord of the Rings” trilogy as tax policy may be deemed unfriendly. This could have an impact on jobs and revenue if not resolved.
Loonie (CAD): Canadian inflation reports were mixed as the CPI rose to 1.9%, but the core rate was lower to 1.5%, showing that food, energy, and housing costs may be increasing. In addition, retail sales figures increased .5%, the fastest pace in nearly 6 months. Higher oil prices are also supporting the Loonie this morning. (Click chart to enlarge)
Euro (EUR): The euro is higher on Dollar weakness and the German business confidence figures that came in better than expected. It should be noted that these figures have been rising steadily for the last 6 months, and this month’s figure shows the smallest gain from previous readings.
Pound (GBP): The Pound is lower ahead of next week’s GDP data that may determine the BOE course of action with regard to further monetary easing. Right now, the threat of easing has been weighing on the Pound, though it has not been fully priced in. The UK economy has held up surprisingly well, but it remains to be seen if this will continue. Overnight, GBP/USD missed my short target of 1.565 by less than 10 pips! (Click chart to enalrge)
Dollar (USD): The Dollar is weaker thanks to Geithner’s ability to speak out of both sides of his mouth. First he claims that the Dollar doesn’t need to weaken further then he sends a letter to G-20 leaders saying that currencies of countries with account surpluses should rise against the Dollar! Which is it, Tim?
Yen (JPY): The Yen is mostly lower, though slightly higher vs. Pound and Dollar as the potential of QE2 from both the UK and US is still in play. Overnight, the MSCI Asia Pacific Index was higher, which helped ease the Yen.
This weekend’s G-20 will mostly likely turn out to be another session of “agree to disagree”. Perhaps the most important aspect of these meetings and the rhetoric from various finance ministers is that they are buying time for their respective economies to recover.
That is the optimistic view, and while I always try to look on the bright side, I rarely am able to. So the markets will continue to move as they do, as the global economy attempts to dodge financial landmines on the road to recovery. And trust me, there will be landmines. Among them are: US elections, QE2, Fannie and Freddie, UK austerity, EU deficits, potential inflation, possible terrorist attacks, just to name a few.
Should this weekend come and go as expected then perhaps the Dollar’s slide will continue next week which may push markets higher going into the US elections and next FOMC meeting. QE2 is still on the table for both the US and UK, so November could bring some excitement back to the markets. Stay tuned!
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