Is There A Conspiracy Going On To Stabilize Foreign Exchange Markets?

by: John M. Mason

Summary

There is a conspiracy theory going around in foreign exchange markets that a secret currency accord was reached at the recent G20 meetings.

Market participants seem to be hoping such an accord might be forthcoming to help fight the loss of credibility that seems to be spreading about the central bank leadership.

Maybe this conspiracy theory going around is just "wishful thinking" of market participants that would like more coherence than what they see in the current central bank behavior.

Roger Blitz, in the Financial Times, writes:

"Did last month's G20 meeting in Shanghai come up with a secret currency accord between the world's big central banks? That is the chatter in the foreign exchange market after a series of policy meeting not short on surprises."

The evidence behind such a claim is fourfold:

"China has to some extent been able to stabilize the renminbi. Then the European Central Bank extended policy easing, but says it has finished lowering rates for now - a move that drove the euro higher against the dollar.

The Bank of Japan passed up the opportunity to lower the yen by easing policy further. And finally the Fed ignored US data that many commentators expected to point it towards a hawkish position."

This is the latest move to create a conspiracy theory concerning the central bank behavior. And these discussions only lead to greater confusion about central bank actions and the falling confidence in the credibility of central bank leadership.

For example, Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis, writes in Bloomberg View about the credibility of the Fed and the problems of maintaining this credibility moving forward.

Diana Choyleva, Chief Economist at Lombard Street Research, writes about "Misguided Central Banks" as she quotes Albert Einstein: "Albert Einstein is said to have defined insanity as doing the same thing over and over again and expecting different results."

Ms. Choyleva adds that "By failing to change their way of thinking since the global financial crisis, the world's main central banks are proving the aphorism right."

She concludes "the ECB, the BofJ and the Fed have missed a golden opportunity this month to make much-needed course corrections…so the global economy is still perilously unbalanced."

What is going on? The answer is that no one is really sure. One problem that Kocherlakota writes about is that "officials must recognize that their expectations for the economy, like all forecasts, are likely to prove wrong."

What should they do? Well, Mr. Kocherlakota says that "they should be much clearer about their willingness to make large and rapid changes in monetary policy." He says that they should stress that they will do "whatever it takes" to "keep employment up and inflation near target."

In other words, the Fed's "forward guidance" should be so broad that it is nothing more than a promise to do whatever it can to achieve the goals set out for it by the US Congress.

But, these goals may be part of the problem, and that is what participants in "foreign exchange markets" are looking for in the comment Mr. Blitz makes in the first paragraph.

Maybe participants in foreign exchange markets are hoping that central banks will take a broader view of their responsibilities than those narrow views they are subject to, given their current mandates.

Mr. Blitz throws up the presence of "current mandates" as the counter-evidence that the central bank leaders would not create such a conspiracy. The leaders of the central banks must follow the goals that have been set out for them by their own governments. They must follow the call of national sovereignty.

Right now, the idea that the G20 countries created a "secret deal" is mere speculation. Another way to view the idea proposed by participants in foreign exchange markets is that it represents some "wishful thinking."

I have presented the idea that participants in foreign exchange markets might actually want a strong US dollar. Any current "wishful thinking" about the G20 getting together and focusing on global objectives in addition to the sovereign goals set up by national "mandates" may just be a reflection of the desire for central banks to take on a broader worldview of what their goals and objectives should be.

Mr. Blitz even ends his article by suggesting that, right now, the central banks are just buying time…that they may be hoping for more in the future.

"Buying time is just about the only strategy (central banks) have going for them - enough time, perhaps, to work out how to draw up a proper currency accord."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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