With all the news regarding the U.S. House of Representatives passing the $1 trillion legislation to overhaul the healthcare system, little attention was paid to the G20 meeting in St. Andrews over the weekend. Most of what was said there was a reiteration of what was said in Pittsburgh last month but there was one thing that was new and very important.
First, the G20 noted the improvement in financial conditions but evaluated it as “uneven” and “dependent on policy support” while restating its pledge to keep expansionary policies in place.
“It is too early to start to lean against recovery,” said U.S. Treasury Secretary Tim Geithner in his speech. “The classic mistake in past crises was to put on the brakes too quickly.”
Meanwhile, in its Global Economic Prospects and Principles for Policy Exit, the IMF outlined the current conditions in global Purchasing Manager Indexes and Industrial Production (expanding) and noted that U.S., European and Emerging Market credit spreads in high yield issues are about at the levels seen just before Lehman Bros. collapsed in September 2008.
The overall picture of the banking system was less rosy however due to undercapitalization, impaired legacy assets the growing number of non-performing loans (look for problems especially in commercial mortgages). Securitization markets, it said, remained dependent on public sector support.
The most interesting comments were reserved for the currency markets and here’s the part with the greatest relevancy:
According to the IMF, despite the nominal depreciation of the dollar this year (due in part in an increase in risk aversion) in real effective terms the dollar has only “moved closer to medium-run equilibrium” and “still remains on the strong side.”
In my opinion, this statement can be considered to be verbal intervention because it implies the IMF sees the dollar as being too strong. Actually, I think what we have here is one of those Major Fundamental Events that only occur once or twice a year, if we’re lucky, and I expect to see dollar depreciation/asset appreciation to continue over the medium term (at least into the second quarter of 2010).
The IMF also said the Chinese Renminbi “remains significantly undervalued from a medium-term perspective,” due of course to the fact that it’s pegged to the dollar (which means that in essence, Chinese monetary policy is pegged to the Federal Reserve).