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Monday, 25 October 2010

Has the G20 done enough to declare a truce in currency wars ?

Andrew Robinson, FX Analyst, Saxo Capital Markets

Has the G20 done enough to declare a truce in currency wars?

The dollar starts the week on a soft footing in Asia, down 0.7%

The G20 “preview” meeting at the weekend did not reveal a great deal for currency markets, though some interesting new elements were worth noting. Geithner’s push for numerical targets for c/a balances versus GDP met with some stiff opposition but nevertheless some comments to these aims were included in the final communiqué, along with a stronger tone on exchange rates.

The G20 communique talked of smaller global imbalances but also contained a greater focus on the impact exchange rates had on them. Countries were urged to move towards more market-based exchange rates and “refrain” from competitive devaluation. (Hmm, today’s USDCNY fix was at 6.6729 versus Friday’s close of 6.6590). In addition those countries with “reserve currencies” should be vigilant against excessive volatility and disorderly movements so, in effect, both sides of the coin were recommended to keep things more controlled – good intentions but the question remains how it could be enforced….

To this end the IMF was tasked with policing departures from so-called indicative guidelines for sustainable balances and measuring any impact of adjustments in major economies’ policies. Again, quite how any “strayings” could be corrected would require a great deal of cooperation.

It was an orderly start to trading for the week though the negative tone for the greenback gathered momentum as the morning progressed. The diffusion of an outright currency war favoured risk and the usual risk currencies were seen in demand. The AUD was given an early lift as PPI data for the third quarter came in well above forecast (+1.3% q/q and +2.2% y/y versus 0.5% and 1.4% expected respectively). Seen as a precursor to Wednesday’s CPI numbers and talk of an Oz rate hike at the next RBA meeting came back to the agenda.

RBA Gov Stevens was speaking today and the thrust was on “cross currents in the global economy”. He said flexible exchange rates were not a fix-all for world growth and global imbalances solution (though more Yuan flexibility would help smooth those imbalances). To this end it would be necessary for emerging economies to boost demand, admitting that this was not an easy task. On the domestic front he noted that households were more cautious while mining investment was at its highest since the late 60s. He expects Australia’s terms of trade to stay elevated, with the mining boom having an expansionary shock. The 2-3% inflation target rate is appropriate and the right goal, warning that tolerating higher inflation would not help the economy.

It is a quiet data session in Europe, with only UK house loans on tap so direction will undoubtedly be determined by Europe’s take on the G20 statement. The US session is better populated for data with Chicago Fed activity, existing home sales and Dallas manufacturing activity.

Economic Data Highlights

* CA Sep. CPI out at +0.2% m/m, +1.9% y/y vs. 0.1%/0.9% expected and -0.1%/1.7% prior resp.
* CA Aug. Retail Sales out at +0.5% m/m vs. -0.1% expected and revised +0.1% prior
* JP Sep. Merchandise Trade Balance out at ¥797.0b vs. ¥710.0b expected and ¥86.0b prior
* JP Sep. Exports out at +14.4% y/y vs. 9.6% expected and revised 15.5% prior
* JP Sep. Imports out at 9.9% y/y vs. 7.4% expected and 17.9% prior
* AU Q3 PPI out at +1.3% q/q, +2.2% y/y vs. 0.5%/1.4% expected and 0.3%/1.0% prior
* SI Sep. CPI out at +3.7% y/y vs. 3.6% expected and 3.3% prior

Upcoming Economic Calendar Highlights
(All Times GMT)

* UK Asset Purchase Facility Quarterly Report (0830)
* UK BBA Loans for House Purchase (0830)
* UK BOE’s Tucker to speak (1115)
* US Fed’s Cumming to speak (1200)
* US Fed’s Bernanke to speak (1230)
* US Chicago Fed Activity Index (1230)
* US Existing Home Sales (1400)
* US Dallas Fed Manufacturing Activity (1430)

TradingFloor/Media Pontianak

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