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FX research roundup: Excitement from Korea this weekend

The G20 meeting is now in progress in Gyeongju, South Korea, with the central bank governors and the finance ministers all in session – presumably this is the part where all the work is done.

Most of the governors and ministers anyway. Both Brazil’s central bank governor Henrique Meirelles and its vociferous finance minister Guido Mantega are sending deputies. There is probably no truth to the suggestion that Mantega believes he must stay at home to prevent further appreciation in the real. He will however attend the heads of state summit on November 11-12 with outgoing Brazilian president Lula da Silva. But the Brazilian attitude seems to indicate a lack of commitment to the multilateral agenda. Analysts at see it very negatively: “Brazil is a major figure in the currency war debate and without it at the G20 table this weekend we doubt any resolutions can be found.”

Should anyone expect anything from this biannual chinwag? Not according to one head of FX: “G20 can only agree that they disagree – and they will probably argue about that too.”

But RBS, in its G20 preview early in the week, while not as cynical was no more hopeful that a meaningful agreement would be achieved. The report took as positives the delay of the US Treasury’s International economic and exchange rate policies report and treasury secretary Geithner’s lukewarm strong-dollar comment. But the fact that “Brazil, China, Turkey and other emerging markets have moved to weaken their currencies” unilaterally can’t be denied. RBS concludes with the observation that the “problems lie not with intent, but with the fundamental environment”; the Fed’s intention to implement further quantitative easing will put pressure on other nations to “either allow their currencies to appreciate or match the Fed’s efforts with additional monetary accommodation (or some combination of the two). But with economic conditions outside the US, particularly in Asia, pointing toward less monetary stimulus, there remains a fundamental divergence of policy focus, one that will severely limit tangible progress at the G20 gathering this weekend. A lack of concrete agreement and action – the most likely outcome – will result not from disagreements about the desirability of more stable FX rates but from the reality of the global economic cycle.”

Morgan Stanley, in Preparing for the G20, notes that emerging market appreciation would bring further capital inflows and that there is hope of a compromise. The bank thinks it is possible that the IMF proposal of “an agreed amount of capital controls may be the pragmatic solution.” But it is difficult to see China being told how much it can restrict inflows. Morgan Stanley also points out that such coordinated capital controls would not lessen the pressure felt in Japan and the eurozone. In turn, that “is causing the increased pressure from European and Japanese policymakers on China.”

It seems that the biggest drama likely to come from the G20 will not be a Plaza-type accord but China being pushed too far and doing a walk out. Hopefully it will not come to that and that this weekend all the excitement will be from Yeongam in Korea rather than Gyeongju.

It’s the Grand Prix of course. C’mon Jenson, c’mon Lewis!

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