G20 could give risk currencies a boost – but don’t count on it lasting
When G20 central bankers and finance ministers meet in Shanghai this Friday and Saturday (Feb 26-27) they’ll likely do their best to come out with a positive statement on the global economy and CNY.
The statement might even provide a further lift to risk currencies, such as CAD, AUD, NZD and some emerging market ones along with risk assets such as equities and commodities – but it’s unlikely to last.
That’s because it’s hard to see what rabbits they can pull out of the hat given there’s not much unity and though the outlook is gloomy, the world is not in the midst of a full blown crisis as in 2007/8. On monetary policy, the US remains divergent from the rest of the pack and the Federal Reserve is unlikely to relinquish its intentions to increase interest rates at this particular meeting.
The US is pushing for G20 members to boost fiscal policy to revive the global economy while desisting from currency manipulation. But Japan and the Eurozone are keen to weaken their currencies and the latter prefers austerity programmes to fiscal stimulus. Neither is likely to budge much on their positions.
China’s currency, CNY, is another focal point with the country having spent hundreds of billions of USD supporting it. There’s real concern that the level of capital flight out of China will eventually send CNY tumbling and create global financial toil in its wake. Measures have been taken to curb speculation against CNY. China may well announce some fiscal stimulus policies and further support measures for CNY, but is unlikely to go as far imposing temporary capital controls as this goes against its stated aim of moving towards market driven frameworks.
Indeed, the two potentially most market boosting measures – the Fed calling time on interest rate rises and China imposing temporary capital controls – would represent a humiliating climb-down for those initiating such actions and would therefore only undertake them under duress.
Nonetheless, the G20 appears keen to make some sort of market boosting announcement, particularly for equities. They may make impressively sounding woolly utterances about market reforms, coordinated fiscal and exchange rate policies. The trouble with that, is that fiscal measures take time to produce results and fear driven markets tend to demand instant gratification.
But it might be enough to temporarily weaken USD and lift some of the risk currencies further for up to a week or two.
TECHNICAL ANALYSIS: USD/CAD waiting for new catalyst to decide direction
CAD has had a torrid time versus USD over the last couple of years mirroring the collapse in commodity prices and the impact on its economy. However, with commodity prices having stabilised recently and USD/CAD peaking at 1.4690 around January 19, there’s been a steady pull back.
An area of solid support seems to have built around USD/CAD 1.3670 and below that 1.3639 and 1.3625. If the G20 manages to talk up markets over the weekend – those levels could be cleared away with attempts all the way down to the 1.3400 area.
Nonetheless, the global economy remains in a fragile state and it’s unclear if commodity prices really have bottomed even though oil seems to be managing to hold above $30/bbl and another economic bellwether market, copper, appears to have steadied above $2.00/lb.
If the recent respite from crashing equity and commodity prices merely turns out to be a pause in an otherwise unfinished bear market, then USD/CAD could soon be challenging resistance at 1.3705, 1.3835 and 1.3945.
By Justin Pugsley, Markets Analyst MahiFX