Let the G-20 Games Begin!
Tomorrow marks the start of the latest round of G-20 meetings where global trade imbalances and currency valuations are going to dominate discussions. With somewhat coincidental timing the Chinese trade surplus came in more than expected, even though the US trade deficit came in less than expected.
In its usual pre-G20 posturing, China has allowed its Yuan to appreciate the most since 1993. (For those of you unfamiliar with the history of the Chinese Yuan, it was devalued by 50% on Jan. 1, 1994 by the government making a single decree). The idea behind Yuan appreciation is not because they are magnanimous and want to contribute to the global economy, but rather because they stand to gain more control of the IMF.
Meanwhile in the UK, the BOE took a slightly more hawkish tone as they see inflation continuing above their target range through next year and that near term CPI figures forecasts have increased.
In the EU, the markets continue to put pressure on Irish and Portuguese bond yields as the market becomes increasingly leery about their ability to service their debt.
In the US, mortgage applications rose 5.8% and initial jobless claims came in better than then the recent average of 450K.
So there is some mild risk-taking, as Yen weakness is driving markets after yesterday’s market reversal that encouraged risk aversion.
In the forex market:
Aussie (AUD): The Aussie is mostly lower this morning as consumer confidence figures declined 5.3% to their lowest levels in nearly 5 months. On a bright note, home loans came in better than expected ahead of tomorrow’s employment report where the expectation is for a gain of 20K jobs, almost half of what was gained in the previous report.
Kiwi (NZD): The Kiwi is mostly higher despite comments from the RBNZ last night that claimed that “loose” US monetary policy is driving up Kiwi value and will likely hurt exports going forward. In addition, Governor Bollard said that recent economic indicators may have been “misinterpreted”. These comments were echoed by the NZ PM who flat out said that the Kiwi was overvalued.
Loonie (CAD): The Loonie is mostly stronger on higher oil prices despite the fact that the Canadian trade deficit came in higher than expected as exports to the US fell by 3.6%.
Euro (EUR): The Euro is mixed as French CPI data came in as expected but manufacturing production figures slipped. European stocks are lower, as yields on Irish bonds have reached a new all-time high. The Euro has reached a 2-week low vs. USD. (Click chart to enlarge)
Pound (GBP): The pound is mostly higher as the BOE quarterly inflation report showed that inflation was still above targets and would likely remain there throughout 2011. This report showed a mildly hawkish tone and should recovery continue despite the austerity measure enacted, then the BOE may have to address those concerns. They are likely to take a wait and see approach to monetary policy for the first half of next year.
Dollar (USD): The Dollar is mixed this morning but showing some strength, particularly vs. Euro and Yen. While the monthly trade deficit did decrease slightly and jobless claims improve slightly, higher bond yields in the US are driving the market as there is increasing speculation that the latest round of QE may be the last.
Yen (JPY): The Yen is weaker across the board and is at a 1-month low to the Dollar as US treasury yields in short-term maturities have increased. USD/JPY is particularly sensitive to 1 and 2 year yields as this has an impact on rate differentials. In addition, Japanese consumer confidence figures have come in better than expected. (Click chart to enlarge)
So once again the G-20 meeting will take center-stage as the politics behind the economics heats up. Some topics to be discussed in addition to Chinese Yuan appreciation and trade imbalances are currency intervention and what emerging markets can do about “hot money” inflows.
Already Brazil is calling for a reduction in using the US dollar as the world reserve currency instead preferring a basket of currencies. Both the US and China have no intention of entertaining these thoughts. Can’t blame a guy for trying though.
What strikes me the most is that over the last 20 or so years, emerging market economies have grown like wild-fire, largely in part to the US Fed and the US dollar. As more money has been created, much of this “wealth” has found its way to these economies and allowed them to achieve unprecedented growth.
Now they are all complaining because the US is “hurting” their economies?
It’s a shame that these economies have such short memories, as it wasn’t that long ago that the Chinese were still riding bicycles and the Brazilians were defaulting on loans.
I’m going to watch this G-20 with interest to see if anything meaningful comes about. Until then, I expect more of the same.
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