Global currency traders are eyeing this important G20 September meeting in China
The G20 finance and central bank deputies’ gathering in Hangzhou on September 4 to 5 will set the tone for the next phase of the currency war
With Hangzhou set to host a summit of G20 leaders on September 4-5, Beijing will no doubt want the event to go smoothly. China will surely want to stabilise the value of the yuan between now and then so as to blunt any criticism predicated on a perception that China has been guiding its currency lower.
If so, then China’s task should be aided by current monetary policy settings in Japan and the United States, by developments in Europe and by the fact that the calendar will work in China’s favour on this occasion.
In the first instance, while last week’s decision by the US Federal Reserve to hold fast on interest rates was no surprise, the fixed income and currency markets failed to discern anything tangible in the statement that would lead them to conclude the Fed might hike rates any time sooner than December, if then.
That might arrest the pressure for the dollar to rise versus the yuan in coming weeks.
National Australia Bank (NAB), writing the day after the Fed’s decision noted that ahead of the July 27 statement “futures markets were pricing a 33 per cent probability of a rate hike in September and 61 per cent by December. Today, these implied probabilities have slipped to 30 per cent and 55 per cent respectively.”
And that was before data on Friday showed that US economic growth in the second quarter of 2016 was considerably below what forecasters had expected. Gross domestic product increased at a 1.2 per cent annual rate compared to the 2.6 per cent expected in a Reuters poll of economists.
That data put the dollar under renewed pressure.
Of course this Friday’s US jobs data, if robust, might re-ignite the debate about when the Fed might hike but even then it doesn’t meet again until September 20-21 by which time the Hangzhou summit will already have taken place.
One country that could raise issues in Hangzhou about Beijing’s yuan policy might be Japan.
At the G20 Finance Ministers’ meeting in Chengdu on July 23, Japan’s Finance Minister told the gathering that “we need to pay attention to the future direction of the Chinese economy, including the yuan.”
Japan’s concerns, at least partly, revolve around the possibility that China will guide the yuan weaker allowing Chinese manufacturers to lock in competitive advantage through the exchange rate channel.
But the direction of the yuan/yen exchange rate is driven as much by the yen as it is by the yuan. If the yuan is weakening against the yen it may well be because the market sees reasons to buy the yen rather than because traders see implicit reasons to sell the yuan.
Tokyo cannot blame Beijing for a lower yuan/yen exchange rate if the move is driven primarily by demand for Japan’s currency.
The consequences of last Friday’s Bank of Japan (BOJ) decision to merely tweak monetary policy settings are a case in point.
Ahead of the July 29 statement, a Reuters poll of economists showed 23 out of 27 expecting some form of easing, and given that material easing would ordinarily lend itself to a weaker yen, it is fair to say that the market was expecting and positioned for policy announcements that would result in a sell-off in the Japanese currency.
Japan’s Bank of Tokyo-Mitsubishi UFJ said that “while the BOJ did ease [on Friday], the steps were relatively minor,” adding that “USD/JPY falling back below the 100.00-level is only a matter of time.”
HSBC takes the view that “the BOJ’s relative inaction [on Friday], and the questions this raises about its ability to ease further under the current monetary framework, also supports our call that USD-JPY will drift to 95 year-end.”
Applying the same logic to the yuan/yen exchange rate, Japan would have little justification for criticising China over any weakening of the yuan versus the yen as the move could be explained as market demand for Japan’s currency following the BOJ’s decision.
Japan’s central bank may well re-visit its monetary policy settings at its next meeting but that falls on September 20-21, weeks after the Hangzhou summit has ended.
Elsewhere, in Europe, the European Central Bank will not reconvene for a monetary policy meeting until September 8, again after Hangzhou.
As for the Bank of England, it meets on Thursday and forecasters expect it to cut interest rates to 0.25 per cent from 0.5 per cent. That’s unlikely to put a spring in sterling’s step against the yuan.
Having inadvertently had a helping hand from the Fed and others, China should be able to stabilise the yuan ahead of the Hangzhou summit, and so be less vulnerable to criticism of its currency policy at that meeting.