Edward Culchenko
The recent summit of G20 finance ministers and central bank governors in Moscow couldn’t but become the key newsmaker for mass media (The Financial Times, Le Figaro, The Wall Street Journal, Manager magazin etc.)
This was a major even in the economic and financial life of the entire world. It is not a secret that G20 accounts for 90% of the global GDP and 70% of the global population. Yet, G20 unites different countries, from Argentina and South America to the USA and Germany. This summit attracted a lot of interest because it was conducted amid global instability and uncertainty along with increasing public debts, debt crises and economic slowdown. There were rumors that G20 members may start currency wars with each other (i.e. artificial weakening of national currencies aimed at reviving their national economies by means of boosting their exports).
However, Christine Lagarde, Managing Director of the IMF, says that all the talks about currency wars are nothing but rumors.
What are the results of the G20 summit in Moscow? Will there be any currency wars? Let’s try to find the answers to these questions together.
G20 Summit
The G20 summit in Moscow shows that there is still confrontation between those countries that support quantitative easing through increasing the money supply and those companies that practice austerity.
There are still tensions and centers of currency confrontation. The summit revealed some new arguments given by the confronting sides:
In particular, the following issues were put on the agenda:
1. Japan’s aggressive monetary policy. The major reason for the tensions between Japan and the USA/EU is the BOJ’s policy aimed at weakening the Japanese Yen in order to boost the country’s export. Since October 2012, the Japanese Yen has weakened by 20% against the US Dollar. In January, Tokyo announced another round of money printing (also known as quantitative easing). Japan is obviously trying to fight deflation, simultaneously stimulating consumption, export and investing activity.
Russian financial officials say the efficiency of these steps is temporary as the cause of the problem is not eliminated. Only speculators can benefit from such currency fluctuations. Mass media report that major financiers like George Soros are buying the Euro and selling the Japanese Yen. Even The Wall Street Journal writes that Soros has already earned some $1bn on this currency speculation.
The chart below, courtesy of , reflects the current state of affairs in the market of USDJPY:
1. The ECB’s strengthening of the common currency. The ECB is still taking steps to strengthen its currency. As of February 1st, the common currency reached the 15-month high.
Some German representatives assume that the strengthening of the Euro currency may escalate and extend the crisis seen in the southern peripheral economies of the eurozone.
At the same time, Mario Draghi, who is in charge of the ECB, is trying to persuade everyone that the current exchange rate reflects the real value of the common currency.
Germany does not assume that the Euro is overvalued as well. However, France, the eurozone’s 2nd biggest economy, urges other European countries to practice political involvement in exchange rates, which is practiced by the USA and Japan.
The chart below, courtesy of , reflects the current state of affairs in the market of EURUSD.
According to Maxim Gunn, an expert of , there is no aggressive selling while the bulls have accumulated pending orders around 1.3300 - 1.3350.
1. The Fed’s monetary policy. The Fed keeps implementing its QE programs. At the same time, the USA’s public debt is enormous. However, the USA keep stimulating consumption and job creation through pumping excessive money supply into the national economy.
In 2007-2010, the government lent $16 trillion to banks, corporations and government at 0% interest rate.
Still, in Q4 2012, the US GDP dropped by 0.1% for the first time since 2009. That is why Obama’s administration is determined to keep weakening the national economy through increasing the money supply, simultaneously blocking all the attempts to agree on borrowing cuts.
However, such a policy is unacceptable for China, the world’s 2nd biggest economy. It holds $3300bn in US T-bonds. It is also unacceptable for Russia, which is the 3rd biggest holder of the US debt after China and Japan.
Here is confrontation between emerging markets and those central banks that keep printing money.
Exporters are crying foul over interest rate cuts, which provoke the inflow of cash in emerging markets, thereby devaluing their currency reserves and affecting their competitiveness.
In particular, China’s GDP increased by 7.8% in 2012. However, this is the lowest pace of economic growth since 1999. Experts say that currency wars are the major reason for the slowdown, especially as the new Chinese authorities (who strive to turn the Renminbi into a global currency) do their best to avoid devaluation. The Governor of the Mexican central banks assumes that those economies that have recently received a major inflow of capital should prepare for the worst as they have got major financial bubbles.
The participants of the summit agreed to abstain from devaluing their currencies, thereby avoiding protectionism and leaving markets open. They say market participants will determine the real exchange rates for every currency.
However, the final communiqué doesn’t condemn Japan’s policies, for example. This means the Japan can keep increasing its money supply, experts say. This allows us to fell rather skeptical about the agreements as other G20 members may continue their monetary policies despite their promises.
We should remember that G20 and G8 are clubs created to exchange views and opinions rather than organizations that can work out efficient solutions to major problems.
What is the way out? Experts offer a lot of solutions, from devaluing all the currencies at once to switching to direct exchange of currencies between countries without the US Dollar peg, which will help to identify the real value of each currency.
The next G20 summit will take place in September 2013 in St. Petersburg, Russia. By then, G20 members will try to work out the ways and means of overcoming the existing crisis phenomena.
Edward Culchenko
