G-20 Coordination Calls Confront a More Complex Global Landscape

  • Countries from Sweden to Japan want to counter currency gains
  • Yen intervention could `buy time' if seen aiding risk appetite

With global currency volatility spiking and equities tipping into bear-market territory, calls have grown for the biggest economies to coordinate a response.

While the Group of Seven, and broader Group of 20, have on occasion issued joint commitments that helped support investor confidence, this time round the complexity of the challenges may make it tougher to agree on an approach that includes policy action.

In the 1980s, the advanced economies agreed on addressing excess dollar strength, and later excessive dollar declines. In the 1990s Asian crisis, developed nations helped organize rescue packages for emerging markets. When a global credit squeeze began in 2007, the U.S. began a years-long provision of dollar liquidity through swaps agreements.

Now, while some emerging markets are facing sell-offs in their currencies, others have seen relative stability. China may prefer a cheaper currency, though has proven unwilling to allow rapid declines. In the rich world, divergent moves among the major currencies have seen the Japanese and some Europeans signal their exchange rates are appreciating too much.

A move toward even easier monetary policies or the provision of dollars by the Federal Reserve could potentially help some emerging-market currencies stop falling, though any associated dollar depreciation wouldn’t be welcome in Japan or Europe, where central banks have already cut interest rates below zero. Politics could also be a constraint and make any coordinated fiscal response difficult to envision.

"These calls always come out when there’s increasing desperation in markets -- they want some sort of clear resolution to stabilize the global outlook," said Paul Mackel, head of emerging market currency research at HSBC Holdings Plc in Hong Kong. "The biggest problem compared with the past is that you could have coordination to help at least one country or set of countries, but this time many are facing the same challenges."

In the run-up to the Group of 20 gathering of finance ministers and central bank governors in Shanghai Feb. 26-27, some analysts at investment banks have called for an agreement such as the 1985 Plaza Accord to address currency volatility. China’s state news agency Xinhua said this week in a commentary that the policies of advanced economies like the U.S. have created spillover effects to others, which then reverberate across the world, and urged coordination and reforms of global economic governance.

For now, it’s unilateral action that has dominated the headlines, with Sweden’s central bank Thursday cutting its benchmark rate further below zero to help keep the krona from appreciating. In Japan, the yen is poised for its biggest two-week advance versus the dollar since the Asian Financial Crisis in 1998, fueling speculation the Bank of Japan may make its first intervention to sell the yen since 2011.

A "smoothing" operation that had the acquiescence of other major countries, particularly the U.S., could still be something that could help break the current market psychology, according to Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who previously had jobs at the Bank of Japan including as a foreign-exchange manager.

"Many investors believe that BOJ intervention is impossible, because it could trigger a currency war or competitive devaluation," Kanno said. "So then one way to surprise the market is to say concern is shared" between Japan and others about the need to restore the appetite for risk, he said.

Confined to Verbiage

"Naturally, this is to buy time, and can’t be a final solution," Kanno said. Each country would need to follow up with determination to address their own issues. Some oil-producing-nation deal to cut back supply could be helpful as a follow-up, he said.

Further volatility may be in store when China’s markets reopen Monday after being shut this week for the lunar new year holiday. China’s hosting of the G-20 gathering puts an even brighter spotlight on the nation’s policy makers, who have faced calls from the International Monetary Fund and others to be clearer in communicating policy intentions.

A political deal between China and the U.S. to support the yuan would risk the backlash of U.S. politicians who have blamed China for American manufacturing job losses. And an IMF move to set up swap lines for its Special Drawing Rights unit large enough to affect market confidence could similarly face criticism in Congress.

With those and other policy options facing barriers, any coordinated global response may be confined to verbiage.

"We expect governments simply to reiterate their long-standing two-pronged position on exchange rates," at the G-20 meeting, Andrew Kenningham, an analyst at Capital Economics in London who previously worked at the U.K. foreign office, wrote in a note. "First, we think that they will agree not to target exchange rates for competitive advantage and, second, that they will note that ‘excessive volatility’ and ‘disorderly’ currency movements can have adverse consequences."