Concerted Currency Intervention is a No-No , so why do people keep asking for it ?

Thursday 25th February 2016

  

Concerted Currency Intervention is a No-No , so why do people keep asking for it?

ref :- "Why a Global Currency Accord Won't Happen", The Wall Street Journal, online

In February 2013 after meetings of both the G7 and subsequently the G20 nations, the powers-that-be declared that coordinated intervention in foreign exchange markets effectively constituted manipulation, and that central banks should focus only on their own economies. If recent events have tested the ability of the US Fed to stick rigidly to the second part of that statement, it was nonetheless a pretty forceful affirmation that in these more complicated times the days of the great currency accords are over. But that hasn't stopped a number of commentators from suggesting that in such volatile conditions (and FX market volatility is often held to be at root of much wider market turmoil), a deal such as the famous Plaza Accord is exactly what the world needs.

That not all of these commentators have the same goal in mind should immediately throw up red flags, but you can't deny the effectiveness of the example they quote. Back in 1985, finance ministers of what was then the G5 (US, Japan, Germany, UK and France) agreed to act together push the soaring US dollar lower at a meeting at New York's Plaza Hotel  --  hence the entirely logical and not very imaginative name given to the accord. In particular, it was the damage being done to US trade by the dollar's strength against the Jap Yen that was the prime motivation behind the deal, and sure enough with some help from currency speculators between 1985 and 1987 the USD declined by a massive 51% against the Yen. You could in fact argue that it was too successful. In 1987 they had to put together another agreement to halt the dollar's decline (The Louvre Accord) and the rampart Yen played a major part in a Japanese asset bubble, the bursting of which Japan has never fully recovered from.

In the face of not dissimilar dollar strength, some are fondly recalling the Plaza Accord. So, if your aim is to massage the dollar lower, what options are open to you? Or to put it another way, if you were US Treasury Secretary Jack Lew what are you going to ask for at the G20 meeting in Shanghai? Having ruled out intervention in currency markets in such forceful terms just three years ago, that route is a non-starter  -- not only are the practicalities of such action very different to thirty years ago but the damage to credibility would be irreversible. And even though the Fed look unlikely to raise rates at the pace that they had hoped for this year, divergent monetary policy between the States and pretty much the rest of the world can only support  the dollar, not weaken it. The only option left open to Mr Lew is to persuade other nations, particularly Germany and Japan, to encourage growth through fiscal stimulus and to spur China on in its efforts to rebalance its economy more towards consumers and to be less reliant on exports and investment.

That's all very well ..... Germany has had the best of both worlds in that despite being a powerhouse economy it benefits from a weak currency in the Euro and consequently enjoys a large current account surplus. Theoretically it's in the ideal position to be more stimulative but Germany is committed to a balanced budget and both its government and its people seem strangely reluctant to spend. Who knows, perhaps the migrant issue will make infrastructure spending unavoidable. As for Japan, any moves that it might want to make in increasing spending or cutting taxes will be severely curtailed by its already huge level of debt.

As so often in the modern world, much revolves around China. There is still suspicion that China's surprise if minimal depreciation of the Yuan was just the start of a hidden and deliberate plan for a much larger depreciation. China has said that misconceptions about its intentions are down to miscommunication, and that it is merely making  the price of the Yuan more answerable to market forces. It's an explanation Mr Lew has accepted but he will need to see continuing Chinese efforts to overhaul its economy. Should that be the case we can assume that he'll take any adverse moves for the Yuan in his stride. If it's perceived however that the Chinese authorities are deliberately engineering a lower currency, well then things could get messy  --  though not as messy as they would if Mr Trump should get to the White House.

All of which is ironic, because there's another body of opinion also calling for a multilateral currency accord that has an almost directly contradictory goal in mind. Its adherents argue that the future of the global economy hangs on the fortunes of China, and only a large depreciation of the Yuan will allow it to cope with capital outflows and the threat of deflation. That being so, and with China so important, G20 should agree to a much weaker Yuan and manage it lower in a calm and controlled fashion. That opinions could be so diametrically at odds is remarkable, but in this case it's a very good reason in itself why currency accords just ain't gonna happen.