Will They Like the Proposed G20 ‘Framework’
Markets focused on the upcoming G20 meeting with early rounds already kicking off in the form of a letter from US Treasury’s Geithner to the G20 members in which he outlined his idea for a ‘framework’ in which to rebalance global imbalances. Full text of the Geithner letter attached below, but the jist was 1) use targets as a % of GDP to target surpluses, using structural, fiscal and exchange rate policies 2) countries should refrain from using FX to gain a competitive advantage and those with significant undervaluations should let their currencies adjust over time, 3) call on IMF to monitor progress.
Early feedback from other G20 members on the Geithner letter were mixed with Japan’s Noda indicating targets were ‘unrealistic’ and Canada’s Flaherty indicating the plan was a ‘step in the right direction’. South Korea’s President Lee called on G20 to implement the Pittsburgh framework agreement and should eliminate global imbalances for growth. India’s Fin Min Mukherjee said he was not in favor of competitive devaluations of currencies.
The contacts we speak to on the street continue to expect very little from the G20 this weekend with most citing the lack of time to prepare for anything more than a discussion at this point. The idea of an accord is off the table in most people’s minds and we agree. Some folks are looking for a ‘framework’ as we have been looking for in our writings from the past couple of days and it would appear the Geithner letter is the start of that.
The USD initially rallied after the Geithner letter and EUR/USD dropped from 1.3960 area down to 1.3860 before rebounding back to 1.3920 now, basically unch from the NY close. German IFO came in better across the board and that has helped keep EUR/USD supported despite French strike headlines and news clips.
USD/JPY was similar with a rise up to 81.30 from 81.00 and we are 81.20 now.
USD/KRW dropped amid relatively light volumes and we traded down to 1123 from 1132 area where there was talk of BoK on the bid.
USD/INR rallied amid comments from India’s Mukherjee indicating the RBI will intervene where necessary and INR appreciation is not abnormal. RBI intervention not necessary last night as we traded up to 44.59 from 44.30.
The RUB basket dropped like a stone in European trading as we touched 35.85 from 36.07 area after Russia’s Central Bank indicated that it sees more room for RUB strength than for weakening. He also confirmed that the CBR sold $650mm yesterday with the intention of moving the free floating boundary by 5 kopecks.
CHF continues to weaken and the rise in EUR/CHF above the 100 day seems to be taking hold a bit for the first time since 2009. The likely medium term target if we stay above the 100 day at 1.3405, is 1.3918. Seems to imply some level of global stability and maybe that stems from hope that the G20 will corral the recent significant currency volatility.
German Bunds are trying to form a base around 129.45 with the low down at 129.08 the key level to watch on the downside, technical analysts on the street feel futures are vulnerable here and a break of 129.08 opens a move to 128.00 and would add further tailwinds to EUR/USD.
Canadian core CPI in line this morning with headline slightly higher than expected and we saw USD/CAD drop to 1.0250 from 1.0300.
W. Brad Bechtel
Faros Trading, LLC
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Disclosure: I do not hold a position in any securities mentioned