BNY Mellon: The Aerial View: Thoughts of the G20

November 20, 2018

By Neil Mellor, Senior Currency Strategist, BNY Mellon

After months of financial market turmoil, G20 finance officials met in Shanghai in the February of 2016 amid calls for "cooperation" as a suitable response to the turbulence. Similar calls for cooperation may well be heard later this month amid market wobbles stemming from its absence. But on trade, the same old obstacles stand in the group’s way.

The G20 leaders’ summit in Buenos Aries will be remarkable for a number of reasons and we can certainly expect a distinct Latin flavor. The summit will mark the first meeting of the group’s leaders in South America and as such, Argentina should also be the first country on the continent to play host to US President Donald Trump.

Indeed, the primary focus will inevitably fall upon Mr Trump – both in regards to the possibility of a USMCA deal, and in regards to his relations with Premier Xi. Although the chances of a Trump/Xi agreement appeared to take a significant blow at the weekend, such an accord would certainly give the summit a rightful place in the history books.

Yet whether or not it can be said that current trade disagreements are reflective of the very deep-seated divergences on economic policy with which the G20 has wrestled unsuccessfully in years past, as we focus on the US and China, it could be that unresolved issues are at risk of resurfacing after a lengthy period of respite.

One Fed official does not a committee make, but new vice chair Richard Clarida’s dovish views on the global economy last week came shortly after what some feel were Jerome Powell’s most cautious comments to date. Certainly 10-year Treasury yields are now to be found near three-week lows while the USD Index has slipped sharply from the month’s highs.

The bulls are not about to give up that easily, but there is at least the possibility of USD weakness materializing just as Abenomics begins to go awry in Japan and just as the eurozone faces a testing period with the ECB tapering its asset purchases. Suffice to say that their currency 'competitiveness' is more important than ever, and any particular emphasis on the need for cooperation in Buenos Aries from select officials will surely signal that they are alert to the risks.

If only the cooperation that is referred to repeatedly by G20 statements were truly possible on trade policy.

The quest for plausible agreement, or cooperation, on currencies and trade is a 'game' in which no optimal solution exists: flexible exchange rate regimes remove the need for a broad-based adjustment of domestic prices and wages in the event that financial imbalances accrue between states.

And even now, 10 years after the global financial crisis, many economies continue to require similarly cautious policy settings to restore domestic equilibriums – the by-products of which have been the spillovers that have constituted the basis of currency wars.

In other words, well-meaning talk of coordination necessarily glosses over the fact that one or more nations must carry the can of a currency ill-suited to their needs – anathema to any central bank and its growth and inflation targets in the current environment.

Who would carry that can? The truth is that there's no magnanimity in international monetary policy.