A Look At This Weekend's Irrelevant G-20 Meeting (As Brazil Intervenes In FX Again)
The biggest non-event this weekend will be the upcoming peace crack pipe pow-wow between the world's most demented Keynesians when a bunch of bloated politicians and economists (except for their much smarter Brazilian colleagues who will instead be frolicking on Ipanema beach and enjoying the fruits of the most artificially-enhanced population on earth) sit down in Seoul and pretend they can come to some resolution over the globalized attempt to destroy all world currencies all at the same time as trillions in shadow money disappears each and every quarter. If this feels like a deja vu, it is - every single G-20 meeting in recent history has had an underlying FX focus, the result ends up being some token agreement, and the very next day the sell off in the dollar continues, as 20 other banks proceed to buy dollars in an act of futility against Ben Bernanke's death star fiat printer. In other words nothing will change. Even JPMorgan agrees: "On Saturday the G-20 may deliver their first statement on FX, and they
may incorporate language which many countries have never collectively
endorsed, but such a statement may not change much in practice. The
status quo, whereby countries manage a dollar decline as best fits their
circumstances as long as they don't deliberately strengthen the dollar,
will probably persist for lack of a better option...The euro too would fall initially, since less intervention implies less
reserve recycling. It would later rally as the dollar broadly declined." In other words - US middle class, a hotdog in Europe will soon cost about as much as it does in Disney Land.
As the G-20 convene, leaks from a draft communiqué suggest the group may commit to avoid “competitive undervaluation” of their currencies and a “more market-determined exchange rate system that minimizes adverse effects of excess volatility and disorderly movements in exchange rates”.
If codified, this language could signal a major policy shift whereby the US achieves its objective of global rebalancing -- Geithner's goal expressed in yesterday's Wall Street Journal interview -- through freely-floating currencies and therefore a much weaker dollar. The euro too would fall initially, since less intervention implies less reserve recycling. It would later rally as the dollar broadly declined.
In practice, however, this language could allow countries to maintain the status quo. Despite the pace of intervention and proliferation of capital controls/transaction taxes, central banks and finance ministries are still allowing the dollar to decline, so partially insulate themselves against claims that they are seeking competitive advantage. No doubt courts could quibble endlessly over the meaning of competitive undervaluation, but the debate would not be so material for markets. Unlike international trade, where most disputes can be taken to the WTO, international finance has no arbiter. As a reminder on how lengthy and inconclusive these exchange rate debates can be, see exhibit 1 below -- a G-7 communiqué from April 2006 calling then for greater exchange rate stability from surplus countries.
Commitments to more market-determined exchange rates would also be fairly easy to comply with. Note that even China, when it abandoned its dollar peg in July 2005, flagged its intention to allow supply and demand forces to influence the currency. And as we have argued before, all G-20 members would endorse less volatile markets, which is why it is likely that the communiqué recycles vintage G-7 language such as that from the April 2006 statement.
The fact that the G-7 asked the same of surplus countries four years ago as they are doing now should give pause to those expecting a seismic policy shift this weekend, such as endorsement of the US proposal for targeted reductions in current account surpluses over time. This proposal recalls the voluntary export restraints the US proposed to Japan in the 1990s, with no durable impact on the trade deficit but disastrous consequences for USD/JPY through a trade war. Multilateral ensorsement of the US's proposal seems a stretch, since many countries regard their surpluses as simply the consequence of the US's overspending. Curbing surpluses would be like asking a company to generate smaller profits.
On Saturday the G-20 may deliver their first statement on FX, and they may incorporate language which many countries have never collectively endorsed, but such a statement may not change much in practice. The status quo, whereby countries manage a dollar decline as best fits their circumstances as long as they don't deliberately strengthen the dollar, will probably persist for lack of a better option.
And speaking of FX interventions and what Brazil thinks of all of this, here is what just happened with the BRL: