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Opinion: Asian nations likely to agree to currency pact at G20 -- Faros
The G20 meeting in South Korea next month will likely result in an agreement on currency valuations, said Douglas C. Borthwick, managing director of Faros Trading in Stamford, Conn.
Michael Caronna / REUTERS
A man walks past a board displaying stock indexes around the world in Tokyo May 7, 2009. Asian shares extended their rally on Thursday as encouraging signs about the health of U.S. banks and the global economy bolstered riskier assets such as oil and hurt safe-havens such as the yen.
According to Borthwick, there is an understanding throughout Asia that there will be an agreement similar to 1985’s ‘Plaza’ Accord at the G20meeting.“Asian countries are very wary of the significant pain that Japan faced in the [years following the ‘Plaza’ Accord] -- the Japanese Yen appreciated by 50 percent [afterwards],” he said.
“For this reason Asian countries are following a two-pronged strategy to limit the pain that will come their way should an Accord be agreed upon. On the currency front they are speeding up the pace of currency appreciation. They are doing so by buying less U.S. dollars against their currencies overnight and by allowing modest appreciation in their currencies prior to daily intervention. On the economic front they are beginning to talk up weakness in their economies.”
In fact, just last night China, Japan and South Korea all expressed anxiety over their economic situations.
A China State Researcher in the Securities Times wrote that “China’s 2011-2015 growth target is unlikely to exceed 8 percent.”
Similarly, Japan’s Prime Minister Naoto Kan said “Japan’s economic downward risk is increasing” and Japan’s Finance Minister Yoshihiko Noda said he saw “some downside risks for economy.”
Meanwhile the Bank of Korea’s Governor Kim Choong Soo said “domestic economic growth will likely slow down.”
In essence, Borthwick says, the Asian nations are resigned to a new accord over currency because they know that the US will pressure them into revaluing their currencies.
“The 1985 Plaza accord was bad for Japan, but very good for the US, and ok for Germany, France and the UK,” he said.
“The only reason Asian nations have been intervening daily to halt currency appreciation is because they don't want to have a currency strengthening faster than China 's – their greatest trade competitor. If there is an agreement/accord [at G20] in the works, then they know that China will allow further strength and so they are able to allow further strength.”Borthwick also noted that as the IMF meetings in Washington have concluded, a number of significant changes in the currency market have taken place.
“In the past three days Russia has widened its basket’s trading band,” he said. “Singapore has steepened and widened its trading band while Australia and South Korea surprisingly left their interest rates on hold; believing a stronger currency does the same for inflation as higher interest rates.”
Indeed, Japan’s chief cabinet secretary Yoo Sengoku said last night that the “emerging nations must push currency flexibility.”“Within the next few weeks we expect a cacophony of voices across Asia bemoaning the economic slow-down that will ensue should their currencies strengthen too much and too fast,” Borthwick added.
http://www.ibtimes.com/articles/7197...r-yen-yuan.htm