March 27, 2017, 8:46 pm
Facebook iconTwitter iconYouTube iconGoogle+ icon

Markets welcome G20’s FX stance

LONDON- Financial leaders from the world’s biggest economies found common ground on foreign exchange at a G20 meeting on Saturday but failed to agree on trade, highlighting a global shift towards protectionism and setting a cautious tone for financial markets next week.

The Group of 20 powers meeting in the German spa town of Baden-Baden reiterated their long-standing warnings against competitive devaluations and disorderly FX markets, allaying fears that the new U.S. administration might have opened up a chink in the G20’s united front on global currency policy.

For markets, no change to G20’s stance on FX is welcome news. Having the world’s financial and economic powers on the same page should help keep FX volatility low, a cornerstone for stable markets and rising asset prices more broadly.

But failure to agree on a commitment to keep global trade free and open will have negative consequences for financial markets, even if not dramatically so immediately.

“We may open on Monday with modest dollar weakness thanks to the failure to agree on trade, but it would have been a lot worse if there were major changes to the FX language on top of that,” Tim Graf, managing director and head of macro strategy EMEA at State Street in London, said.

The dollar has slipped recently even though the Federal Reserve has raised U.S. interest rates, because longer-term bond U.S. yields have eased back. The dollar had its biggest weekly fall for two months last week.

Similarly, the upward momentum on Wall Street has fizzled out this month after a string of record highs, although European markets have continued to advance.

The pullback in longer-term yields despite a rise in shorter-term yields suggests investors think growth and inflation are not strong enough for the Fed to lift rates much further. This so-called “flattening” of the yield curve has weighed on stocks and the dollar.

An initial draft of the G20 communique earlier this month had removed almost all of the boilerplate language on FX from previous communiques. It had removed warnings against “excess volatility” and “disorderly” FX moves as well as a pledge to refrain from “competitive devaluations”.

They were all reinstated.

G20 and G7 communiques have long stated that stable and strong growth is best fostered by stable and calm currency markets.

The level of implied volatility in the euro/dollar exchange rate over the next month fell last week to 6.075 percent it’s lowest in two and a half years. One-month dollar/yen implied volatility hit its lowest in over a year.

According to economists at JP Morgan, one of the main reasons for the depressed volatility across financial markets currently is because volatility in global growth is now the lowest in at least half a century.

Yet one sentence from last year’s G20 communique - the shortest and one of the most important - was omitted: “We will resist all forms of protectionism.”

This points to a fundamental disagreement between the U.S. administration and the other 19 participants, particularly the Europeans, who flatly rejected any form of protectionism.

U.S. Treasury secretary Steven Mnuchin said that the previous communique was not necessarily relevant to the current global economic climate from his point of view. He said he favoured “free” trade but some agreements might need to be renegotiated.

Yet despite the isolationist and anti-globalisation rhetoric from the U.S. administration, the implementation of protectionist policies and reality of trade wars are not immediate concerns, analysts say.

“This G20 is not really a big deal for the market, partly because the language on FX was maintained,” Kenneth Broux, head of corporate research, FX and rates at Societe Generale, said.

“The disagreement on trade and protectionism is new, but the meeting at a later date between U.S. President Donald Trump and Chinese premier Li could be more pertinent to where trade negotiations are headed,” Broux said.

Washington may have signed up to the language on FX, but it is widely believed that it wants a weaker exchange rate. It blames the persistent U.S. trade deficit, manufacturing decline and lack of competitiveness on the dollar’s strength. - Reuters
Category: 
Rating: 
No votes yet
Twitter icon
Facebook icon
Google icon
LinkedIn icon
Pinterest icon
Reddit icon
Yahoo! icon
e-mail icon

Column of the Day

Duterte immobilized

By DODY LACUNA | March 24,2017
700 View(s) 0 Comment(s)
‘He should deter the AIDS outbreak victimizing the youth whom he has pledged to protect always.’

Opinion of the Day

Reviving Laguna de Bae (2)

By DAHLI ASPILLERA | March 27, 2017
318 View(s) 0 Comment(s)
‘Industry and residents must be disciplined; penalized. “We are doing all these for the local subsistence fishermen.” – Jaime Medina, LLDA general manager.’