We’ve seen this picture before, folks. Another G-20 meeting has come and gone and once again world economic leaders have pledged to cooperate with one another to foster the global economy. The headline is that G-20 nations left the meeting having cast aside the currency war of competitive devaluation. Sound familiar?
However, one of the important takeaways is that the US did not pledge to avoid QE2, and Geithner’s public comments that China is going to allow their currency to appreciate may fall on deaf ears. China will allow their currency to appreciate, but when China feels like it.
What this all adds up to is some short-term goodwill, but long-term the problems still persist. Should Bernanke and the Fed go for QE2, then any “progress” that was made could be all for naught. There is a summit scheduled in a few weeks but I expect more of the same.
As a result of the weekend’s events, the Dollar has resumed its slide against all other currencies, hitting a new 15-year low vs. Yen.
The Aussie came close to parity with USD, as PPI figures came in much higher than expected showing that inflation may be picking up and prompting the need for another rate hike.
In the Euro zone, Industrial New Orders picked up and were almost double from last month, beating expectations.
Lastly, the Yen is showing strength as the threat of direct BOJ intervention has subsided due to the G-20 meeting. But should Yen strength persist, they may be forced to act in some manner as monthly exports grew at the slowest pace this year, due to decreased world demand and a stronger Yen.
In the forex market:
Aussie (AUD): The Aussie is higher across the board as PPI figures came in hotter than expected for the 3rd quarter. PPI grew 1.3% vs. an expectation of .5% and CPI figures are due out on Wednesday that could put the nail in the coffin for another rate hike. Should current trends continue, the Aussie will be trading above parity with USD by the middle of this week. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is mostly higher due to Dollar weakness, but there is unusual Yen strength going into this Wednesday’s RBNZ rate policy meeting. The RBNZ is expected to keep rates unchanged at 3%, as recent economic weakness and the earthquakes have widened the disparity between the Kiwi and Aussie economies.
Loonie (CAD): The Loonie is mostly higher taking its place in the risk hierarchy, though lower vs. Yen. So today cannot be described as a classic risk-taking scenario. Canadian GDP figures are due out on Friday, which given Canada’s close ties to a weakening US economy; could be worse than expected. However, weak USD could push the Loonie back closer to parity with USD.
Euro (EUR): The Euro is mixed this morning, trading lower vs. commodity currencies and Yen, but higher vs. the Dollar and Pound. The Euro is back up above 1.40 vs. USD and could continue to despite the French riots (strikes) which are reportedly costing the country 400 million euro a day. (Click chart to enlarge)
Pound (GBP): The Pound is weaker against all but USD as the UK QE2 is very much on the table as confidence is waning that the budget cuts won’t send the UK into a double-dip recession without it. The Pound is the second worse performing currency (next to the almighty greenback!) since July.
Dollar (USD): All you need to know about the markets today is that Dollar weakness is the primary driver. While the G-20 pledged to not manipulate their respective currencies, somehow Geithner escaped without having to remove the threat of QE2. Therefore, stocks and commodities are higher and there is some news out later today about the state of the housing market but I’m not sure the market cares anymore.
Yen (JPY): The Yen is showing strength after reaching a new 15-year high vs. USD. The pledge to not directly intervene in its currency has embolden investors, as perhaps the Yen will now cement its place as the ultimate safe-haven currency as the Fed is committed to killing the Dollar. Under a normal risk-taking environment, Yen would be weaker than Dollar though it seems as though money is fleeing Dollar as fast as it can.
While it’s great that leaders can come to these agreements, they mean very little without a means to enforce. So it’s more of the same. One thing to note from this meeting though, is that the fear of inflation is now picking up. While it was fine for a while to export our inflation to other countries around the globe, eventually it will come home to roost.
As household have to spend more and more on necessities, there will be less to spend on housing. While the Fed thinks this may encourage the job market and help the employment picture, flooding the world with Dollars is not the answer. In fact, current US policy may force more business to flee the US, not encourage it to come here as companies need to make much longer projections before undertaking new operations.
And until we get some certainty about regulatory and tax policy, things may get worse before they get better. Next week is the FOMC meeting and should Bernanke launch the QE2, it could end up sinking the US economy like the titanic. Stay tuned!
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