G-20 members meeting in Toronto agreed to reduce their
collective fiscal deficits in half by the year 2013 and stabilize
or reduce the debt-to-GDP ratios by 2016. However on the issue of
bank regulation, the G-20 adopted a more cautious schedule
noting, "Based on our agreement at the Pittsburgh Summit that
Basel II will be adopted in all major centers by 2011, we agreed
that all members will adopt the new standards and these will be
phased in over a time frame that is consistent with sustained
recovery and limits market disruption, with the aim of
implementation by end-2012, and a transition horizon informed by
the macroeconomic impact assessment of the Financial Stability
Board (
FSB
) and BCBS."
The initial reaction in the currency markets was mildly
pro-risk with euro and cable rising at the start of the Asian
open. However, by early European morning trade much of investor
appetite for high beta FX waned and euro dropped to 1.2350 from a
high of 1.2395 while cable fell back towards the 1.5000 handle
wakened in part by the softer than expected Hometrack housing
numbers which printed at 0.1% versus 0.4% eyed.
Overall the promise by G-20 to address the growing fiscal
deficits amongst many of its member economies is a step in the
right direction and should ultimately be viewed positively by the
capital markets. However, each members' ability to curtail
spending will depend to a very large extent on the performance of
the global economy going forward. To that end the monthly micro
economic data rather than the big global macro themes such a
sovereign debt default will likely become the much more dominant
driver of currency market movements in the foreseeable future.
This week the market will get a glimpse of critical economic
metrics including German unemployment data, US ISM Manufacturing
report and finally the US NFP report on Friday. If the news
continues to surprise to the downside, safe haven flows will
likely resume with US dollar and yen rallying further as
enthusiasm for the risk trade fades along with the hopes to
contain deficit spending.