The G20 Meeting in Seoul, Korea promised to be quite eventful, and it did not disappoint.  On Friday, we discussed several possible outcomes from the meeting, and the one we deemed most unlikely actually happened-the countries agreed on something!

The G20 agreed that no country would engage in "competitive devaluation" of its currency, and, instead, they would all allow the free market to establish exchange rate values according to the underlying fundamentals.  Analysts were a bit surprised that such a decision was reached so easily.  Leading into this meeting, tensions had been mounting between emerging markets and developed nations regarding exchange rate values.  Extremely low interest rates in developed nations has led investors to pull capital out of those investments and funnel that capital into higher-yielding assets in emerging markets.  This increased capital flow into emerging market currencies has, of course, caused a massive appreciation in emerging market currencies over the last few months.

Most analysts expected serious tensions and divisions to surface during the weekend as a result of this impending currency war, but the unanimous decision to reject competitive devaluation is a sign that countries are willing to work together to bring a healthy balance and even recovery to the global economy.

But Will Everyone Really Be So Nice?

This is the million dollar question.  Every country at the G20 agreed to not engage in competitive devaluation, but it remains to be seen whether countries actually follow through in action.  Several countries are already labeling further quantitative easing measures from the Federal Reserve as competitive devaluation of the U.S. dollar and that may be enough for some emerging market countries to say, if the U.S. is doing it, then we are going to do it.

Trade Imbalances

Timothy Geithner proposed that the G20 address international trade imbalances by instituting a 4% cap in either direction in current accounts.  That means no country would be allowed to run a current account deficit larger than 4%, and no country would be able to run a current account surplus greater than 4%. 

Geithner's proposal experienced a mixed reception among the G20, but the official statement did address trade imbalances, as it stated that the G20 will adopt "the full range of policies conducive to reducing excessive imbalances."  Currently, China, Japan, and Germany run huge account surpluses while the United States and several other countries run major current account deficits.

Germany was, of course, a primary critic of Geithner's proposal, and Bundesbank President Axel Weber stated that Germany should not be blamed for having a current account surplus.

The primary criticism levied against nations who run large current account surpluses is that these countries are too dependent on foreign nations for economic growth.  Instead of relying on domestic demand to stimulate economic growth, these countries consume the demand of foreign nations.  Some economists and analysts see this almost as "cheating" in the race for global economic recovery.

China never did release a formal statement regarding Geithner's proposal, but it is commonly known that China is very protective of its current account surplus, and it does not have any immediate plans to reduce it by any significant measure.

Chinese Yuan

China's currency has been a hot topic in the financial world for several months.  China has been keeping its currency, the Chinese yuan, pegged to the U.S. dollar in order to keep a competitive advantage in international trade and fight off aggressive appreciation of its currency.  Many countries have been voicing opposition to China's policy, and these countries, including the United States and Canada, have been calling for China to allow its currency to appreciate and be established by the market according to the dynamics of supply and demand.

China has been very cautious in allowing the yuan to appreciate, stating that a rapid appreciation of the yuan would lead to both social and economic unrest in China and around the world.  The United States did not overtly accuse China of currency manipulation in the G20 meeting, and instead attempted to address China's strong currency by proposing the trade imbalance limitations.  China has agreed to continue to let the yuan appreciate slowly, however, and Timothy Geithner stated today that he is confident China will continue to allow its currency to appreciate appropriately.

Emerging Market Presence

Emerging markets are becoming an increasingly essential part of the global economy, especially since these nations are recovering at a much stronger pace and posting consistently, strong levels of economic growth.  Therefore, the group agreed that Europe will surrender two seats on the 24-member executive board in order to allow an increasing presence of emerging market countries.

EUR/USD

The dollar opened lower against all major currencies Sunday night as the G20 was widely regarded as good for risk assets, which means a lower dollar.  The euro did find resistance, however, during early European trading, and it has moved down slowly, but consistently all day Monday.
 Note: Past performance is not indicative of future results.
The euro has hit good support at the 1.3970 level, which is the 50% fib level and also a strong area of former resistance on the hourly chart.  If there are euro bulls, this is a level that should interest them.  We have seen a nice 30 pip initial reaction off the level, but we have not seen a break above the key psychological figure of 1.4000.

Key Economic Data This Week

This week there is quite a bit of significant economic data due for release.  The most important release of the week will be this Friday's Advanced GDP out of the U.S.  GDP is released in 3 reports, with Advanced GDP being the first and most important one.  The entire global, financial world is focused on economic growth in the United States, so this figure should be quite market-moving.  The Federal Reserve will most likely use this figure as a major determinant as they decide whether to go ahead with further quantitative easing measures in the November meeting next week.  If the GDP figures surprises to the upside, we could see the Fed hold off for another month, but if GDP does come in as expected or below expectations, then the Fed will most likely decide to go ahead with further QE measures.