The Group of Eight (G-8) Finance Ministers met this weekend to set up an agenda for their central bankers when they meet on July 8-10 and to discuss the reversal of stimulus to the global economy. While they did mention that it was not time yet to begin this process for fear of a reversal back into a new recession, just the fact that that they are beginning these discussions is enough to start moving currencies all around.
The G-8 is composed of the United States, Japan, Germany, France, the United Kingdom, Canada, Italy and Russia. These are the largest industrialized countries in the world. So when they meet, traders take note, especially currency traders.
In July, when their central bankers are present, I'm sure we will get more details on this as the G-8 and the International Monetary Fund (IMF) begin to discuss the best way to rein in $2 trillion in stimulus packages.
Some of the things that came out of this weekend's meeting will help certain currencies and hurt others, over time. So, let's talk about what was said and then which currencies will be affected and why.
Most of the focus of the meeting was on how they could stay on the growth track that has just begun again and not pull the global economy back into the recession. If they were to pull the stimulus too quickly, they would risk a rerun of the last two years.
However, if they don't start to withdraw the stimulus quickly enough, then inflation could rear its ugly head and cause a huge problem, too. So it's a tough balancing act.
The important thing to take away from this meeting is that these global finance ministers must think that the worst is over and that we're coming out of this recession that's lasted almost two years. Otherwise, they wouldn't be having these talks just yet.
That's a bullish sign for the global economy and for certain currencies.
So, which currencies are to benefit from the statement that they released to the public? The commodity currencies: the Australian dollar (AUD), Canadian dollar (CAD), and New Zealand dollar (NZD).
That's mainly because of this one statement they issued: "There are signs of stabilization, though the situation remains uncertain as climbing unemployment and volatile commodity prices present obstacles."
It's these volatile commodities that are heading higher, pushing up the initial rounds of inflation that most people haven't caught onto yet. The rise in these commodities will end up helping out the countries that export commodities and draw much of their profits and GDP growth from them. Those are the currencies mentioned above.
Which currencies get hurt from all of this talk? It's obvious that risk seeking is returning to the markets as investors plow back into commodities and stocks stabilize.
The currencies that will get hurt the most are the ones that lose their luster when economic stabilization returns. They include the U.S. dollar, yen, and Swiss franc, but predominately the dollar and yen.
The dollar and yen were the beneficiaries when the world was sliding off a cliff. However, if that's not the case anymore — and it seems that these finance ministers seem to agree that it's not — then there's no need for currency investors to hide out in the dollar and yen anymore.
Therefore, they'll go back into the beaten down, riskier currencies that do well when economies rebound.
So, over time you will see the Australian, Canadian and New Zealand dollars continue to rise up against the falling U.S. greenback and yen.
The risk play is back on and so is the carry trade. It's been a couple of years, at least, since I could say this, but the tables have finally turned.
The pound and euro will benefit some. But the commodity currencies will flourish the most as investors believe that more inflation is imminent.
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