G20/IMF meetings

The International Monetary Fund (IMF) and the G20 hold their spring round of meetings from the 19th – 22nd April in Washington. This is where the world’s most powerful leaders meet with the top players in the IMF. The agenda for this meeting includes the Eurozone debt crisis, the Middle East and the size of the IMF’s resources to address global financial stress.

Prior to the meetings the focus has been on the size of the IMF’s rescue fund to help fight the Eurozone crisis. We have had some progress on this front. Japan pledged another $60bn, while Sweden and Denmark pledged $17 bn between them. However, this is nowhere near the $400bn that IMF chief Lagarde has said she would like to raise at this meeting. Lagarde has already had to reduce her target for IMF funds; back in January she said she wanted to raise a further $500bn.

The big question is where the rest of the funds will come from. China has pledged to support Europe however it didn’t give any details about how much or when it would be willing to give funds. China is not alone in sticking to a cautious path, some countries are likely to hold out from committing more money to the IMF until 1, there is consensus on the issue amongst the G20 and 2, the Eurozone commits more funds of its own to the rescue pot.

The US and Canada are unlikely to provide any more funds, as in recent interviews their finance ministers have not sounded keen on boosting their contributions. This is a blow to the IMF as the US is its biggest contributor. This leaves the emerging market powerhouses like China and Brazil to foot the bill. South Korea’s Finance Minister said that he doubted there would be a deal in boosting IMF resources this weekend, and instead agreement on a deal may be agreed in principle, but the nitty gritty detail may not be hammered out until the next round of leaders meetings in June.

Market Moves

In recent years the IMF and G20 meetings have had little effect on the markets as they tended to be more like talking shops where little concrete action was implemented. However, now that the Eurozone debt crisis has engulfed Spain and potentially Italy the stakes are higher. The Eurozone has squeezed as much funds out of its member states as is possible for the time being, bringing the total rescue fund to EUR 800bn, which is not enough to bailout either nation. To boost investors’ confidence that there is a financial shield big enough to protect these two economies (and help to reduce their bond yields) more external funds from the IMF will be necessary.

Geithner said before the meeting that the IMF was in a position to raise a “substantial amount of capital quickly”, which he said was good because it could help provide confidence there is a cushion big enough for Spain, Italy et al. However, the markets want detail and will be looking for a concrete number this weekend.

Added to this, there is extra pressure to boost the Eurozone’s firewall because the first round of the French presidential elections takes place this Sunday. The front-runner is the Socialist candidate Hollande who has pledged to change the Eurozone’s fiscal pact and to increase public sector workers. This may drive a wedge between France and Germany, who have thus far been the two de-facto leaders of the Eurozone throughout this crisis. If the Socialists do well this would likely be the market-negative outcome and may dent sentiment towards the euro and euro-based assets in the near to medium-term.

The IMF/ G20 meetings could impact financial markets in two ways. Firstly, by influencing investor confidence. A deal could boost market sentiment. If the IMF can raise its target of $400bn extra funds this could trigger a relief rally in asset markets and cause peripheral European bond yields to come off. This would be euro positive in our view and may cause euro-dollar to rise above near-term resistance at 1.32. However, we believe it is more likely that the meetings won’t come to a final agreement on boosting funds for the Eurozone, which could weigh on the single currency. This could hit euro-dollar particularly hard, and if there is a good showing for the Socialists at the French election then we could see a break of 1.3057 – the bottom of the Ichimoku daily cloud and start of a technical downtrend. If this happens then it may open the way to a breach of the key 1.30 support level. Below here the 1.2650 lows from mid-January may come back into view. This could also weigh on EURGBP, and cause another leg lower towards the 0.8090 lows from mid-2010.

The second way the meetings could impact the financial markets is through currency flows. However, we don’t believe there will be a currency effect from countries that do pledge funds to fight the Eurozone crisis, for example Japan’s $60bn. Although that money will need to be changed to euro at some stage, the money tends to be drip fed into the IMF, which reduces the FX impact.

Источник: Forex.com

20.04.2012