Brown Brothers on G-20

October 30th, 2009 8:21 am | by John Jansen |

The G20 meets next week. Around it will be opportunities for officials to jawbone the foreign exchange market.  A number of countries have expressed varying degrees of concern about the impact of the strength of their respective currencies, including Russia, Brazil, New Zealand, South Korea, Canada, South Africa and Norway.  It is also clear that the euro zone finance ministers would not like to see a sustained move above $1.50.  However it is one thing not to particularly like the developments in the foreign exchange market and it is quite another to do something about it.  To be sure, Russia and Brazil have intervened and the former continues to cut interest rates and the latter has slapped a 2% transaction tax to discourage foreign buying of the real.  However, the flood of global liquidity, the general decline in market volatility and the stronger risk appetite seem to overwhelm official action.   Many seem to recognize that the dollar’s weakness is fundamentally derived from its low interest rates and indications that they will remain low.  Moreover, the decline in the dollar is understood by many observes as not wholly undesirable insofar as it helps correct the infamous global imbalances.  Here is where China enters the picture.  China’s peg to the dollar is seen as an important obstacle to the re-balancing of the world economy and senior PRC officials seem loath to allow significant yuan appreciation until the export picture improves substantially.  In turn, the export picture is partly dependent on the global economic outlook (China exports more to Europe than the US) and officials are warning that the appreciation of their currencies may adversely affect their recoveries.  The market recognizes pressure building on China to allow appreciation and the 12-month NDFs have climbed higher for the second consecutive month.  The 0.6% rise this month in the 12-month NDF’s follows a 1.4% increase last month.  The market is pricing in a 2.5%-3.0% appreciation of the yuan in the next 12-months, with most of it appearing in the second half of the period.  The talk of reform of the international monetary system and a alternative reserve system that was the rage six months ago has diminished considerably, but while the U.S. is no spearheading the demands for the yuan to appreciate, others seems to stepping up.

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