G20 Pledges to Coordinate Stimulus Exit Plans to Limit Market Volatility (Euro Open)

Finance ministers and central bankers from the G20 nations pledged to coordinate plans to exit expansionary fiscal and monetary policies in a bid to limit destabilizing volatility in the interest rate and currency markets at a summit in London, but cooperation looks less likely as the economy improves.

Key Overnight Developments

• New Zealand House Prices Rose for Fourth Month in August, Says QV
• G20 Pledges to Coordinate Stimulus Exit Plans to Limit Market Volatility
• Euro, British Pound Diverge Against US Dollar in Overnight Trading

Critical Levels

The Euro traded higher to start the trading week, adding as much as 0.3% against the US Dollar. The British Pound diverged from the single currency, slipping downward to test as low as 1.6366 against the greenback.

Asia Session Highlights

New Zealand’s House Prices advanced for the fourth consecutive month, adding 0.7% through August according to Quotable Value (QV), a government valuation agency. In annual terms, prices fell -2.8% from a year before, the smallest decline in 13 months. QV valuation manager Glenda Whitehead said that, “The housing market is strongly driven by confidence and that appears to be returning.” Indeed, Westpac’s measure of consumer sentiment rose to the highest since the fourth quarter of 2007 in the three months through June. Rising home values may create a perception of growing wealth among property owners, helping to boost consumer spending and by extension spur overall economic growth. New Zealand Finance Minister Bill English has said the economy will begin to expand again in the second half of this year. On balance, however, this may prove of little help to the New Zealand Dollar considering the central bank has pledged to keep interest rates low for now, saying they will remain “at or below current levels” until the latter part of 2010.

Finance ministers and central bankers from the Group of 20 nations (G20) concluded a summit in London with a pledge to keep expansionary fiscal and monetary policy in place for as long as need be to ensure the durability of the nascent economic rebound that has been seen over recent months. Most critically, policymakers agreed to some global coordination as countries eventually begin to unwind stimulus measures to limit volatility in interest rate and foreign exchange markets. However, building consensus on such issues as bank regulation and executive compensation is already proving difficult in the absence of imminent economic meltdown, and agreeing on a coordinated plan to withdrawing stimulus seems like it will be more daunting still, threatening sharp swings in government bond yields and the corresponding currencies.

Euro Session: What to Expect

The Euro Zone Sentix Investor Confidence indicator is expected to print at -13.7 in September, showing pessimists outnumber optimists by the narrowest margin since in 14 months. The metric hit a record low in March and has tracked European equities higher ever since, now showing a hefty 92.3% correlation with a Morgan Stanley index reflecting the average performance of EZ-based stock exchanges. Interestingly, it appears that the formation of major tops and bottoms in equities have preceded similar developments in the Sentix by about one month, meaning price action had shaped investors’ outlook as presented in the survey rather than the other way around. To that effect, it would appear that the reading offers little insight into the future direction of risk appetite and so is unlikely to make a lasting impression on currency markets.

Written by Ilya Spivak, Currency Analyst
Article Source – G20 Pledges to Coordinate Stimulus Exit Plans to Limit Market Volatility (Euro Open)