In the month leading up to the gathering of 20 developed and developing economies, the global forex trading community has focused on several major themes and issues that will be addressed during the meeting.
Some – such as the need for more prevalent global cooperation to stoke the fires of a global economic recovery – are not very controversial, while others – such as currency manipulation and currency intervention – are expected to be hotly debated.
Here is a summary of the events leading up to the G20 and what we can expect to emerge from the conclusion of the meeting on Friday.
G20 Member Reactions to the Fed’s QE2
One major event that was largely anticipated by the global forex trading community leading up to the G20 meeting was last week’s announcement by the Federal Reserve of a new, $600 billion dollar quantitative easing package for the American economy.
The most notable reaction to the QE2 announcement came from German Finance Minister Wolfgang Schauble, who claimed that “US policy is clueless”. The controversy stems from American claims that China is artificially devaluing the yuan – while the QE2 program will ostensibly do the same for the dollar.
Also, Chinese and Brazilian officials also commented negatively on the news, stating that the policy would create excessive liquidity and would not be likely to benefit the global economy.
Review of the G20 Finance Ministers’ Meeting
Leading up to the summit have been two meetings of G20 finance ministers, in an effort to create the agenda for the summit and hammer out details for the Seoul Declaration that will be revealed on Friday.
Last month, G20 finance ministers met and agreed that November’s summit would focus on IMF governance reform, currency control, and creating market-determined exchange rate systems. The meeting – largely viewed as a success – was crucial in paving over bumps in the road caused by disagreements in the global community about currency manipulation involving China, the United States, Japan, South Korea, and others.
Yesterday, deputy finance ministers met once more to finish the Seoul Declaration, a summary of the consensus of the G20. It is expected to show support for global financial reform and a move towards market-based exchange rates between currencies, instead of artificial manipulations.
Three Main Issues at Stake
The global forex trading community will need to pay attention to three main issues that will be at the forefront of discussion during the two-day summit.
Financial Institutions as “Too Big to Fail” and Basel III Accords
One issue that has garnered a surprising level of support across the board in the G20 is the notion of tougher capital requirements and other regulations for global financial institutions – including a vow to make sure that financial institutions that are “too big to fail” are not allowed to wreak havoc on the global financial system.
A major component of the consensus plan lies with the Basel III banking accords, which call for tougher capital requirements for global banks, including reform with leverage ratios, common equity, and liquidity ratios. The aim here is to lessen the risk in the market posed by largely-deregulated banking institutions, like the ones that helped to drive the global economy into the ground in 2008.
Market-Based Exchange Rates
Perhaps the most controversial issue on the table, the idea of flexible, market-based exchange rates should be supported by the G20 as a whole in light of recent global disputes regarding currency manipulation.
The most volatile issue – one that still has not been completely resolved – involves charges that China has artificially devalued the yuan and refused to let it appreciate based on the market. Critics allege that China benefits from an enormous trade balance precipitated largely by the weak yuan. Japan and South Korea also traded barbs earlier this fall over interventions in the market by each government in an effort to control the rising value of the yen and the won, respectively.
It will be interesting to note what the Seoul Declaration will say regarding market-based exchange rates – and if a consensus will be reached on further currency interventions.
Finally, investors should key in on another major issue: the issue of large trade imbalances that threaten the viability of the economic system.
The hot-button topic here involves the growing trade imbalance between the U.S. and China. To ease fears that the issue could overshadow the G20 summit and cause strife, President Barack Obama stressed the need for global cooperation and acknowledged that the U.S. must change to better the situation.
These comments came at the right time, just as British Prime Minister David Cameron targeted China by saying its massive trade surplus is a danger to other economies in the global community.
It is not expected that the issue will degenerate into an open row, but the issue of trade imbalances will certainly prove to be one of the more anticipated topics at the summit.