The just ended G-20 summit in London was supposed to bring some answers to financial crisis spanning the world. After couple days spent debating and series of meetings,  key agreements was published. Summit was declared a success and politicians, after taking some pictures together, moved on, most of them to  NATO meeting. I posted full list when it was first announced.
Last item listed there has to do with international trade. Participants agreed  to “rejection of trade-blocking measures to protect individual countries economies, plus another $250 billion in financing to help trade flow.” This is the most interesting part, from the perspective of currency trader. At first glance, this means that countries wouldn’t enact any new protectionist measures, such as “Buy America”, or impose new and unfair tariffs on foreign products. After closer examination, though, there is much more to it. According to summit briefings, delegates  understood that foreign exchange markets could be used  as a tool of protectionism and undermine efforts of global recovery. They cited recent huge moves in currencies as harmful to any farther progress.
Most importantly, they pledged to avoid competitive devaluations of their respective currencies. This would mean no more direct interventions by central banks, like what we witnessed in mid March, when Swiss National Bank sold the Franc on the open market. This action sparked fears of other financial authorities doing the same. According to the agreement reached in London, this will no longer happen.
Really? Language of press release doesn’t describe how quantitative easing would be treated, but that is another way to devalue one’s currency. Governments world over have embarked on campaign of flooding markets with money, through purchase of securities like bonds or notes. Intentional or not, this policy has similar effect as intervention. We saw how markets reacted to recent FED decision of buying as much as $300 billion worth of treasury paper- dollar was dumped in a convincing manner.
Does this agreement carry any weight or was it only a show of good faith on international stage? Let’s take a look at another point from this communique – the $1 trillion dollar commitment to the world economy through the International Monetary Fund, which loans to governments in financial trouble, and other institutions. This includes  amounts PREVIUOSLY donated. Japan unilaterally gave $100bn last November, while the EU pledged €75bn ($101bn) last month. It was said China had pledged $40bn to the IMF but Beijing is yet to  confirm the figure. There were no new commitments from the US or Saudi Arabia. In fact,  the $1 trillion amounts to a generalised pledge, rather than money in the bank. An “aim to make substantial progress by the spring meeting” was mentioned. In other words, all the bombastic statements of global fiscal stimulus, the largest “the world has ever seen”, are barely worth the paper they are printed on. For now at least.
If the most important part of the agreement is not what seems, it doesn’t bode well for the “competitive devaluation” part. While talks were under way in London, ECB is rumored to have steped in and support Eastern European currencies, at the expense of the Euro. Polish Zloty and Hungarian Forint were the main beneficiaries. Even if more direct interventions are put on hold now, those quantitative easing actions will continue unabated. Most likely scenario is that volatility will remain high, which is good for active traders.
We will see soon if central banks indeed stick to what politicians drafted. Swiss Franc recovered all the ground it lost to USD. Currently it is even stronger than before SNB intervention.

As it was pointed out in Swiss secrecy and Franc, SNB never stated the objectives they hoped to achieve by intervention. If they really wanted to weaken Franc, one should reasonably expect another action soon, since CHF is stronger against USD now. Should they do nothing, it puts a big question mark on motives behind previous move. Some suggested, that it was a punitive action, for being pressured to relax bank secrecy laws by international community. Lack of commitment at current level would reinforce that idea. Of course SNB has a perfect out now- sticking to the summit agreement. Whatever happens, trading Forex is  certain to remain interesting.

Mike K.