Financial Professionals


G-20 Matters


In September, we introduced an economic calendar on the Virtus website.  As I craft that calendar each month, I generally identify one theme that shapes the monthly events.  In September, for instance, it was "softening economic data;" for October, it was "FOMC and inflation."  Thinking about November, it is " the competitive currency devaluation war."  Yes, we have a critical election here in the U.S. and yes, an important FOMC announcement awaits on November 3, but the ongoing global currency war is what I believe investors need to focus on.

To that point, the G-20 meeting just concluded in Gyeongju, South Korea.  Here is what is important:

  1. U.S. Treasury Secretary Timothy Geithner introduced the concept of Trade Account Surplus and Deficit Caps as a percentage of domestic GDP.  No actual policy action was administered. The conversation, or debate, regarding Geithner's proposal will intensify at the November G-20 Summit in Seoul.  Expect emerging nations to vigorously oppose the plan. Call me simplistic, but I am skeptical not about potential policy enactment but rather about enforceability. The euro zone attempted restricting the size of budget deficits; obviously that didn't work at all.  So how does the G-20 enforce violation penalties?
  2. German Economy Minister Rainer Bruederle openly criticized FOMC Chairman Ben Bernanke, specifically stating "it's the wrong way to try and prevent or solve problems by adding more liquidity..." He went on further to say "…excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate."  That certainly does not sound like the globally coordinated efforts of central bankers in the first half of 2009.
  3. For those that remain skeptical of the emerging nations' growing global economic contribution, please pay heed to the following G-20 policy action.  Europe will give up two seats on the IMF board and other developed nations will relinquish at least 6% of current quotas all to emerging nations. The emerging world is getting more and more well deserved seats at the "big boy table."
  4. Finally, Treasury Secretary Geithner left the meeting and flew directly to China for meetings with Chinese Vice-Premier Wang Qishan.  Not surprising at all and nothing new.  Keep in mind, if there was more bite than bark in the G20 chatter regarding currency balance, a trip to China the very next day would not be on Geithner's agenda, nor probably welcomed by the Chinese.

The Fall 2010 competitive currency war has not changed course.  Developed nations will seek to export their way out of the current economic crisis via a cheaper currency.  China will continue to move at a tortoise pace in allowing its yuan to appreciate.  I believe the path for U.S. dollar remains lower.  Concrete historical evidence remains that currencies tend to trade in a very seasonal pattern.  To that point, please note the charts below.  Over the past 3 years, the U.S. dollar has found its yearly peak or trough in late November.


Source: Bloomberg

US DOLLAR INDEX 2009 - November 26 yearly low

Source: Bloomberg

US DOLLAR INDEX 2008 - November 21 yearly high

Source: Bloomberg

US DOLLAR INDEX 2007 - November 23 yearly low

Source: Bloomberg

Past performance is not a guarantee of future results.

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