G7 Meeting Begins on Feb 13 – Why it is Important for the USD?

Last updated 2/12/2009 2:52 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

On Friday, finance ministers and central bankers from the Group of Seven major industrialized nations (G7) will be gathering in Rome to discuss the global financial crisis. Russia has also been invited to attend part of the meeting along with the IMF, World Bank, WTO and the OECD. China has not been invited.

Over the past 30 years, G7 meetings have triggered major tops and bottoms in the US dollar and given that currencies will be discussed at this meeting, any official changes to the FX portion of the G7 communiqué could lead to a turn in the US dollar. Coordinated interventions are the most effective types of interventions in the currency market, which is why a cohesive message from G7 nations has such a powerful impact on currencies. All currency traders need to be careful of sharp volatility on Sunday if G7 nations change their statement on currencies.

The Power of G7 Meetings

The impact of G7 meetings on the EUR/USD and USD/JPY are illustrated in the following chart. In April of 2008, the G7 expressed concern about the fluctuations in currencies. At the time, the EUR/USD had been on a tear and their sharpened stance on exchange rates suggested that they were open to coordinated intervention. Unsurprisingly, fear of action by the G7 triggered a top in the EUR/USD. The same impact on the currency market can be seen in 2003, when the G7 called for more “flexibility in exchange rates.” Although this criticism was directed at China and Japan, it came on the heels of a strong dollar rally. In the late 1980s, the sell-off in the US dollar came to a screeching halt when the Louvre Accord was signed at the G7 meeting. The last time the Group of Seven met was in October 2007 and at that time, they singled out the appreciation in the Japanese Yen.

EUR/USD Chart

  USD/JPY Chart

This will be the first G7 meeting for US Treasury Secretary Geithner. He will probably use the platform to promote the US’ Economic Stimulus and Financial Stability Plans. He may also call for more currency flexibility from China as the Obama Administration toughens their stance on the Asian giant.

From Geithner, the other G7 nations expect more detail on the particulars of the US plan. Protectionism could also be a hot topic as he is expected to face sharp criticism about “Buy American” policies. The French on the other hand will be criticized for their auto sector bailout.

Current FX language

Here is the current G7 Finance Ministers and Central Banker’s stance on currencies:

“ We reaffirm our shared interest in a strong and stable international financial system. We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. We continue to monitor markets closely, and cooperate as appropriate.”

Although no one is happy with the sharp moves in the US dollar, Japanese Yen and British pound, they may not be willing to commit to harsher language on Asian currencies. The dollar is already strong and a tougher stance on the Yen and Yuan could trigger a broad based dollar rally. In a more stable market environment, G7 nations would be all over the rapid appreciation of the Japanese Yen, but right now, they have bigger fish to fry. In all likelihood, the current stance on currencies will probably be repeated but if the statement is changed, we could see major volatility in the foreign exchange market when it reopens on Sunday. There could even be gaps which make it extremely important for traders to consider reducing their exposure before the currency markets close on Friday.

What is the G7?

The G7 or Group of Seven was formed in 1976 and include the seven major industrialized nations:

United States

United Kingdom

Germany

France

Italy

Canada

Japan.

The G8 includes Russia.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.