All You Need To Know About G20 Summit & Its Implications For FX Markets - Credit Agricole

The G20 summit is the most important event of the week and could become a key driver of the G10 FX markets. The G20 finance ministers and central bankers will discuss ways to respond to the latest global growth slowdown and the resulting turmoil in the global markets.

Indications that the G20 will pursue ever closer coordination of the diverging central bank policy cycles, refrain from competitive devaluation and emphasise fiscal stimulus as a way to boost domestic demand should all help prop up market risk sentiment in our view.

A recent speech by the IMF's President Lagarde's highlighted the need of better synchronisation of the Fed's tightening cycle with the easing cycles in Europe and Asia. The November 2015 G20 statement acknowledged that strengthening fundamentals could lead to monetary tightening in some countries.

The language could be changed this week to take into account the global impact of the Fed tightening. If confirmed, such changes could be seen as less supportive for USD but positive for risk. That said, with the markets still quite sceptical about the extent of the Fed tightening this year and the US core inflation accelerating, we doubt that any negative impact on USD would be significant. USD could also benefit from a recovering market risk sentiment against EUR and JPY.

Ahead of the G20 summit investors have been speculating that a 'Plaza Accord'- style agreement will be needed to prevent further escalation in the FX market volatility. In particular, some clients are arguing that a concerted effort to engineer a broad CNY-depreciation will be needed (either in the form of further CNY/USD appreciation or EUR/CNY and JPY/CNY appreciation) to alleviate market concerns about hard landing in China and capital market outflows. We do not think that a Plaza accord 2.0 is forthcoming, however, not the least because we doubt that a sharp FX depreciation will help China avoid hard landing and, more importantly, engineer a successful transition towards a more balanced, domestic demand-led growth.

Where we do see scope for greater G20 policy coordination is in addressing the latest escalation of the global currency war, which has fuelled concerns about global disinflation and global growth slowdown. In particular, we think that the G20 finance ministers and central bankers could reiterate their strong commitment to abstain from competitive devaluation and safeguard global financial stability. The comments could be seen as a direct response to the latest attempts by the Chinese officials to cheapen the CNY. To the extent that they fuel expectations of subsiding FX volatility and abating capital outflows from EM, the comments should help boost market risk sentiment.

The G20 will likely reiterate their confidence in the effectiveness of the unconventional easing policies pursued by the ECB and the BoJ. The message may ring rather hollow, however, for the market participants who now worry that the central banks have reached the limit of their ability to stimulate growth and inflation. We therefore expect that the G20 statement will emphasise the need for both monetary and fiscal stimulus to meet their targets for boosting G20 growth and inflation.

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