Ahead Of The G20: Buy The Rumour And Sell The Fact - Credit Agricole

The latest rally in risk has been attributed to abating fears about hard landing in China (where the Q1 GDP numbers came in line with expectations overnight) and the continuing recovery in the global commodity prices. We would argue that another reason for the buoyant market sentiment of late is the expectation that the meeting of G20 finance ministers and central bank governors in Washington today would reaffirm the official support for global markets.

Indeed, investors bought risk in the wake of the February G20 meeting in Shanghai because it seemingly put an end to the disruptive global currency war and contributed to the recent dovish shift in the Fed policy outlook or the ‘Yellen put’. A similarly marketfriendly outcome from today's meetings should help boost the outlook for risk. To be sure, despite the latest rally, the global capital markets still need official support given the persistent downside risks to the global recovery evident in the recent downgrades of the IMF’s and the World Bank’s growth outlook.

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We therefore expect that the G20 comments will reiterate its commitment to policy coordination in order to support the markets. Those looking for indications that there is now greater willingness to prop up the recovery via fiscal stimulus could be disappointed, however. With concerns about the ineffectiveness of monetary easing still unabated, the realisation that the market rally rests on the central banks' shoulders could curb investor risk appetite. What is more, not all G20 members benefited from the recent rally. Indeed, while the US stock and bond markets bounced on the back of the ‘Yellen Put’, the European and the Japanese markets underperformed as the prospect for further easing dwindled. In addition, the price that the BoJ had to pay for supporting the global markets was brutal JPY appreciation that threatened the already fragile domestic inflation and growth outlook.

We therefore suspect that the Japanese officials will try to make their case heard in Washington when they discuss the conditions under which an official involvement in the FX markets becomes necessary. Evidence that the G20 finance ministers and central bank governors endorse monetary easing policies that can trigger FX depreciation or signal acceptance to FX interventions in the event of disruptive market moves could come as a surprise for the investors that have concluded that the global currency war is all but over. Adding to the surprise would be indications from both the BoJ and the ECB that they are ready to resume easing if needed. Both JPY and EUR could remain vulnerable on the back of that.

We further suspect that the impact on risk sentiment of the so called Shanghai G20 accord may soon start to dwindle in the absence of a credible 'Doha deal’ between the OPEC and non-OPEC oil producers on April 17 to freeze production at levels that will reduce the imbalance between supply and demand for oil. The risk is that the longer-term outlook for oil will remain challenging once the positive impact from the upcoming US driving season starts to abate and oversupply concerns persist on the back of growing Iranian production and stabilising shale oil output from the US. The above makes us maintain our fairly cautious on the commodity currencies.

We suspect that CAD could be vulnerable to further profit taking in the wake of the BoC meeting, which highlighted officials’ growing concern about the impact of FX appreciation on the economy.