G-20 Meeting Uneventful - US Dollar Drops

Monday, 25 October 2010

Hopes that there may have been a slither of good news out of the G-20 meeting this weekend have been dashed, and as such, the US Dollar has dropped in the opening day of trade this week. As at 2:52pm JST, the US Dollar was broadly lower against a basket of currencies.

The outcome of the G-20 meeting for the USD seems to be a resumption of its downtrend, after a lack of information was released in regards to economic strength in the main countries participating in the talks.

Despite the lack of fundamental drivers from the event, an announcement did cross the wire that the underlying economic indicators are showing that competitive devaluation of currencies is coming to a halt - especially given the recent news that the GDP of countries such as China are increasing, albeit at a decreasing rate.

This also comes to give a whole new meaning to intervention by the Japanese Foreign Ministry - and as a result the market has sold off the USD/JPY pair, as the threat of currency intervention seems to have been diminished by the news.

The USD/JPY opened near a 15 year this morning, and has remained there ever since. We expect the USD/JPY to sink even lower this week, possibly testing the 80.00 mark, if not heading even lower.

Despite this, intervention is still a solid possibility in the weeks ahead, especially if the Japanese central bank doesn't see the kid of currency relief they have been hoping for. Ultimately, no comments from the G-20 meetings are going to derail the ultimate desire of the Japanese to have their currency depreciate in value, and there will certainly be an ever present stigma against the US and its incredibly weak currency (which strongly benefits US exporters and therefore the US economy).

As far as quantitative easing measure are concerned, the focus is very much back on the Fed to give the market another hint at future direction in this matter. There was a feeling of change in the market at the end of last week, when the US Dollar broadly gained on the idea that quantitative easing isn't going to eventuate in the US economy. This could still be the case. However, given the economic data which is due to come out of the US this week - we'll have to wait to see what the likelihood really is of this happening.