The G20 did in fact pledge to avoid competitive currency devaluation, as the draft document suggested.
In return, emerging countries will get a bigger say in the workings of the IMF.
That’s an important first step and the market will likely test the resolve of the more active managers of exchange rates like China, Korea and Brazil early next week. If they intervene as usual, the dollar will remain pressured against the majors. If they refrain, the dollar should fall against emerging market currencies and recover against the majors as reserve diversification out of dollars into EUR, AUD, GBP, etc should lessen going forward.
Here is the key nugget:
Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates.
If the large economies really do try and rein in volatility, which implies either intervention or less aggressive monetary policy, a dollar recovery could quickly ensue. The US would be more keen to sell a little EUR/USD than tie the Fed’s arms, in my view.
I’d suggest refraining from trading the early Asian session and get a sense of how the market is interpreting the news before jumping into a position. If the market takes the rhetoric seriously, you’ll have plenty of time to get on board.
Some in the press are portraying the deal as a failure since the US proposal to limit current account deficits/surpluses was not adopted. To my mind, if we had gotten the above deal without the current account gaps being discussed, it would have been portrayed as a huge break-through…It’s kinda a big deal.
Here is the full text of the communique.
