The G-20’s Weaned Currency Intervention

Despite historic hypothesis about a Plaza-like joint currency effort among major powers, the G-20 financial official meeting in China, although focusing on the renimbi in particular in a multilateral setting, reiterated a previous pledge to avoid manipulation without charting new direction. At the 2013 conclave Japan was in the hot seat with its hyper-quantitative easing program crashing the yen, but in Shanghai policymakers passed with appreciation following the recent central bank move to negative interest rates. They agreed not to criticize purely domestic actions with indirect exchange rate impact but will work with the IMF on tougher peer review and spillover analysis. The Chinese hosts promised clearer communication and acknowledged near-term fluctuation potential in the new basket regime, but argued that large-scale depreciation was unlikely based on economic fundamentals. The ECB and Federal Reserve remained on the sidelines as they contemplate opposite stances against the fluid global backdrop, as US Treasury Secretary Lew girded against congressional accusations of currency manipulation within the Trans-Pacific Partnership proposed free trade pact, with Vietnam’s China-like peg approach often cited. Major emerging market units such as the Brazilian real, Russian ruble, and Indonesian rupiah have recovered against the dollar this year after 2015’s steep losses, and no standard formula can clearly identify misalignment and volatility is often attributed to reduced market-making capacity in the asset class. The last big Asia-oriented intervention was during the late 1990s financial crisis to weaken the yen and strengthen the dollar, with China a secondary player in the drama as it separately forswore large devaluation like its neighbors. The 1985 Plaza and 1987 Louvre understandings involved specific coordination between North America and Europe under pre-euro arrangements which were updated and adapted during swap line mobilization in 2008-09. At the Shanghai gathering China’s renimbi achieved automatic prominence with entry into the SDR, but the Mexican peso and South African rand are the most liquid developing country proxies.

Emerging stock markets stayed in a funk with the meager summit outcome with the core MSCI and BRIC indices down 7 percent and 12 percent respectively through February. In Asia China and India were both off 15 percent, while Indonesia and Thailand posted high single-digit gains. In Latin America, Peru was up 10 percent ahead of presidential elections with free-market advocate Fujimori in the lead, although it may be demoted soon to the frontier list on limited volume. In Europe Greece with a 30 percent decline is the worst performer, although the Czech Republic and Poland are also struggling. Turkey leads the pack with a 5 percent advance, and Russia is flat. In the Middle East Egypt is another laggard (-12 percent), and Gulf frontier markets are likewise negative so far in 2016 as they shift attention to domestic debt development with plunging oil revenue. European and African indices are in bad shape with Serbia and Nigeria at the bottom with 15 percent drops. Asia with the exception of Bangladesh slipped as well, and in North Africa Morocco and Tunisia are both ahead. Argentina as the sole Latin America representative tops the roster with a 12 percent increase despite peso battering with its anti- capital control crusade.