Saturday, October 30, 2010

Global Forex Market

AT the Group of 20 nations meeting, finance ministers from industrialised and developing economies acknowledged a “fragile and uneven” global economic recovery and pledged to avoid employing competitive depreciation of currencies.

Nonetheless, discussions on maintaining sustainable levels of trade balance, a major determinant of exchange rate levels, concluded with ministers agreeing only to “indicative guidelines” with the IMF chosen to be the referee.

With respect to rebalancing the global economy, IMF is set to release specific critiques of countries’ policies at the upcoming Seoul Summit on Nov 11 and 12. Without enforceable mechanisms, many Asian countries were seen reverting to capital controls and currency interventions during the week. Bank of Korea, for instance, highlighted that measures to mitigate capital flows may be “useful”, while China’s Central Bank set CNY’s reference rate level at 6.6912 against USD, the weakest level since September.

On another note, emerging markets were allocated a bigger voting and financial stake, with Europe ceding two of its nine seats on the 24-member IMF board.

Federal Reserve of New York surprised markets by prompting bond dealers to estimate the size of asset purchases, leading investors to believe that the next quantitative easing measure would be in line with market expectations.

The Wall Street Journal’s survey of economists revealed that the Fed is poised to purchase about US$250bil per quarter, and may continue until Q2 2011, totalling to US$750bil in all. The expected amount pales in comparison to the US$1.75 trillion deliberated during the financial crisis. Fresh optimism resurfaced during the week, following a series of better-than-expected economic data.

Durable goods orders reversed a previous decline, rising by 3.3% in September, indicating that companies are likely to remain on an expansionary mode.

In the same month, housing sector posted gains, with new home sales rising by 6.6% over a month ago, compared to 1.1% in August.

Australia’s CPI rose by 2.8% (y-o-y) in the third quarter, lower compared to 3.1% in the previous quarter. Moderating inflation pressures spurred expectations that the Reserve Bank of Australia may keep the key interest rate unchanged, prompting AUD/USD to plunge by 1.3% during the week.

Growth in Asian economies seems to be moderating, following recent appreciation in the region’s currencies. South Korea reported a Q3 GDP growth of 4.5% (y-o-y) from 7.2% in Q2, with the slowdown attributed to declining export levels. In Taiwan, industrial production growth halved to 12.2% over a year ago, the slowest growth rate in 11 months.

On another note, in a move to address global economic rebalancing, China’s vice-commerce Minister indicated that the nation’s trade surplus would “definitely” be narrower compared to levels in 2009.

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