Brave New World

G7 Review 16/02/2009

The G7 meeting has given an interesting series of indicators for the FX markets, despite a rather anemic mention of currencies in the communique. Although comments by finance ministers – France’s Lagarde about sterling, Geithner about the yuan- and rumours about Japanese intervention, in previous weeks suggested at least that exchange rates would be an important item for discussion at the meeting, by Friday Reuters was quoting sources saying that the G7 was unlikely to spend much time on the issue. In the event, calls for China to allow its currency to appreciate were watered down. Following Geithner’s rather aggressive comments about China’s currency policy back in January, and Premier Wen’s subsequent reminder that his country did not have to keep buying US Treasuries, it was interesting to hear the Treasury Secretary praising China over the weekend for playing a very important and stabilising role in international finance. The other ‘winner’ from the G7 meeting was the UK Government, which managed to avoid any overt criticism of its policy of benign neglect towards GBP. Chancellor Darling even claimed that the issue of sterling was not even raised. The two ‘losers’ from the meeting were the Eurozone and Japan. In particular Japan, which posted an apocalyptic -3.3% GDP growth in Q4 of 2008 (making an annualised -12.7% growth!) and so dwarfing economic decline in any other developed world country, has greatest cause for complaint. This collapse is growth emanates almost entirely from lost exports, which have been crippled by the JPY’s meteoric rise as a result of its safe haven status.