G20 Plans on Meeting in Los Cabos
In the last few hours, election results show that the New Democracy party in Greece is ahead by half a percentage point. This development has come as a relief to investors around the world. New Democracy has stated its commitment to current austerity and bailout programs. Previously, investors had expressed concern about Greek elections. If the wrong party was elected, investors believed that there was a possibility that Greece would leave the European Union. The most recent results of the election have offered world markets a brief moment of respite from the European financial crisis.
G20 Is Set to Meet
The heads of government in 20 different nations around the world are set to gather in Mexico this week. This meeting in Los Cabos is to include discussions of internal imbalances and the Eurozone crisis. In former G20 meetings, the top nations of the world clashed over how to deal with protectionism and market interventions. After years of global recession, the G20 is ready to come together to discuss ways to ease financial problems.
The United States and Brazil are expected to voice their opinions at the meeting about currency controls. Both nations have suffered from Beijing’s decision to keep the value of the renminbi artificially low. Complaints about China have risen to heated levels in the past, but this time around most concerns will be quieted. As China’s account deficit is reduced, the amount of its undervaluation continues to fall. Although Brazil and the United States still suffer from the wrongly valued currency, the effects have been eased in recent months. Last year the renminbi had been undervalued by 16 percent and 28.5 percent against the dollar. In comparison, the renminbi ranges from 7.7 to just 2.8 percent. Since 2008, it appears that currencies are at their most accurate alignment. In 2008, protectionism and interventions caused the world’s currencies to be undervalued by 8.4 percent. Today, that number stands at just 2.6 percent.
Can Americans Keep Their Jobs?
Although Washington D.C. loves to use rhetoric about the Chinese taking away American jobs, it seems highly unlikely that Congress will push through any legislation on it this year. With presidential elections occurring in November, congress members do not want to pass any legislation that can affect reelection.
Currency wars always have the potential to flare up in the future, but for now they seem quieted down. In the future, it may flare up again due to high unemployment rates in first world countries and weak economies. The United States Treasury has managed to remain out of any past currency wars and does not label China as a currency manipulator.
Brazil’s Currency Loses Value
The real has dropped a quarter in its value against the dollar. Although this can be troublesome for some investors, it will help out domestic manufacturers within Brazil. A lower valuation of the real lets the country to compete better in domestic and foreign markets.
Part of the drop in the real is a result of falling industrial production and the Eurozone crisis. The central bank cut its interest rates from 12.5 percent last August to just 8.5 percent last month. As commodity prices drop, the real has dropped to R$2.09 from its strongest level of R$1.54 in July of 2011.
Around the world, nations are embarking on quantitative easing methods that have hit Brazil hard. Hot money floods into the developed worlds and causes false appreciations in the currency’s value. Brazil, in particular, has had its export market drop off due to all of the foreign investments and hot money. In retaliation, Brazil has created a tax on foreign loans that are for less than two year. This six percent tax is exempt for individuals who have loan terms that last for two years or longer. Brazil has criticized the United States’ currency policy as well as Chinese intervention for creating the rise of hot money and foreign investments.
Data suggests that loose monetary policies around the world have driven the misalignments that are being felt in developing economies. Taiwan and Malaysia are both undervalued while currencies in Australia and New Zealand are substantially overvalued. Investors will soon have to face the repercussion of governmental policies in the coming months.