It’s G-20 time again. Leaders from the major economies of the world have gathered annually since 1999 when Finance Ministers met in the aftermath of the financial crises in Asia, and Latin America. It has evolved into a global governance steering committee.
Canada is at a distinct disadvantage at this year’s meeting. There are eighteen world leaders and the European Union represented at this meeting. Canada sent a mascot.
A “political leader” is defined as a person who rules or guides or inspires others.” A mascot is a person or thing that is used to symbolize an organization. Which definition do you think is more applicable to Justin Trudeau?
This year’s G-20 is in Hamburg, Germany. It could be a doozy, thanks to President Trump.
The G-20, despite all the hoopla, is really an informal gathering. All decisions are made by consensus but none are binding on any nation. Host nation leader, Chancellor Angela Merkel’s agenda is pro climate change, pro free trade, and mass migration.
President Trump pulled the US out of the Paris Climate Accord, is cancelling, and tearing up trade agreements and building a wall to thwart immigration.
That sets the stage for some interesting discussions and “tweets.”
Mr. Trump is unlikely to reverse his positions on trade, immigration or climate change making the meeting with Russia President Putin, the marquee event.
Russia and the US have exchanged harsh words over each other’s actions in Syria.
The left-wing press and Democrats are up in arms (especially Hillary Clinton) over Russia’s supposed meddling in the US election.
European leaders seem to want the US to be their “bodyguard” against aggressive Russia policies or actions.
Russia is irked at the US and the EU for imposing sanctions on them over Crimea.
Mr. Trump may have tipped his hand in a speech in Warsaw, Poland on July 6. He called for Russia to cease its destabilizing activities but avoided accusing them of sole responsibility for election tampering.
One thing is for sure. Whatever happens between President Trump and President Putin, someone, or some faction, will be annoyed.
And speaking of being annoyed, the release of the minutes from the June 14 Federal Open Market Committee (FOMC) meeting, irked both hawks and doves.
The hawks were looking for some evidence that the committee was on track to raise rates up to two more times in 2017. They didn’t find any. The doves were looking to see signs that the June 14 rate hike was the last in 2017. No joy for them, either.
The minutes did hint that the FOMC would start the balance-sheet drawdown in September in an effort to reduce the $4.5 trillion of Treasury bonds and mortgage backed securities.
Inflation was another sticking point for the Committee. Specifically, some members were concerned about downside risks to inflation due to low readings while others pointed low rates of unemployment posing upside risks to inflation.
FOMC members may have been concerned about low inflation, but Bank of Canada Governor Stephen Poloz isn’t.
In fact, in an interview with Germany’s Handelsblatt paper on July 4, Mr. Poloz said “If we only watched inflation and reacted to inflation, we would never reach our inflation target, we’d always be two years behind in the reaction. So, we have to look at the rest of our indicators in the models that predict inflation.” He added that he expects inflation to be “well into an uptrend” in the first half of 2018.
Economists started jumping aboard the Canadian rate hike bandwagon on June 12 when Deputy Governor Carolyn Wilkins spoke about “applying the brakes when approaching a red light.” She was referring to managing a rise in inflation and the brakes in her analogy are interest rates.
Her remarks ignited a near 3 cent Canadian dollar rally as economists and strategist revised their Canadian interest rate forecast. Prior to her speech, most economists predicted a domestic rate increase occurring sometime in the first quarter of 2018. By July 5, the market had priced in an 80 percent chance of a hike in seven days.
That’s not all. Several economists are looking for a second rate increase in October.
The idea of rising Canadian interest rates has made traders forget their concerns about soft oil prices, the re-opening of the North American Free Trade Agreement and a torrid housing market. As long as those issues are on the back burner, the Canadian dollar has scope for more gains, with 80 cents a likely target.
The G-20 is an entertaining distraction for FX markets but its central bankers that are in the driver’s seat. The age of easy money is coming to an end. Mario Draghi, Janet Yellen, and the like control how quickly it ends and by default, the currency direction.