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G7: Statement changes, policy doesn't

Mon, Apr 14 2008, 13:24 GMT
by Teis Knuthsen

Danske Bank A/S

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The easiest way to understand what the G7 body did this time is to focus on what it didn't do: The G7 did not call for intervention in money, credit or FX markets. It did raise its voice on exchange rates, for the first time since Boca Raton in 2004, but relative to the general tightening of the statement, the change in tone on FX looks like par for the course. The main conclusion is therefore that no accord has come out of this. Con-certed intervention still looks somewhat unlikely, though the risk of such action has admittedly gone up. China's currency was again singled out, but reflecting the drop in USD/CNY since the February meeting, G7 now encourage further CNY gains rather than stress the need for a stronger CNY. What the G7 did do was to turn more negative on both the economic outlook as well as financial markets. The negative outlook for the US economy was singled out and although emerging markets were seen as doing better, US Treas-ury Secretary Paulson also made it clear that "nobody believes in decoupling".

EUR/USD fell from Friday's close at 1.5815 to a low of 1.5672 this morning. We recommended buying EUR/USD spot at the break of 1.5760 today, targeting 1.60 and with a tight stop at 1.5670. We were short USD/JPY going into the meeting from 102.4 and with a target of 98.

Below are three central paragraphs from the G7 statement:

"The global economy continues to face a difficult period. We remain positive about the long-term resilience of our economies, but near-term global economic prospects have weakened. While economic conditions dif-fer in our countries, downside risks to the outlook persist in view of the ongoing weakness in U.S. residential housing markets, stressed global financial market conditions, the international impact of high oil and com-modity prices, and consequent inflation pressures. The performance of emerging markets has been a bright spot, but these countries as well are not immune from global forces. "

"The turmoil in global financial markets remains challenging and more protracted than we had anticipated. In the context of a weaker economic outlook, financial markets confront the interrelated issues of: re-pricing of risk and significant de-leveraging; managing counterparty risks; accommodating balance sheet adjustments; raising capital; improving the liquidity and functioning of key markets. We welcome efforts by many financial institutions to improve disclosure of exposures to structured products and related risks, and raise significant new capital."

"We reaffirm our shared interest in a strong and stable international financial system. Since our last meet-ing, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate. We welcome China's decision to increase its flexibility of its cur-rency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate. "

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Published on  Mon, Apr 14 2008, 13:38 GMT