Foreign Exchange Markets

Background:

Commodity-linked currencies such as the Canadian and Austrialian dollars (CAD and AUD), the Norwegian Krone (NOK) the Brazilian Real (BRL) the Chilean Peso (CLP), South African Rand (ZAR) have benefited from the recent surge of energy and metal prices as well as an unwinding of safe haven USD positions. As such they are also vulnerable to any correction in commodity prices.

Ahead of the September G20 meeting in Pittsburgh, , statements about the international monetary system and exchange rate coordination have died down after rising over the summer. Any such statements attract attention by FX watchers but the common interest of all countries may be to avoid this focus.

Central banks' outright purchases of government debt - effectively 'printing money' - has been negative for the currencies of countries conducting quantitative easing (QE) as the perceived debt monetization raises concerns of inflation.

China's PBoC governor Zhou suggested in March 2009 that the world use the IMF's SDR (special drawing rights) as a new global reserve currency instead of the U.S. dollar. This would de-link the global reserve currency from the economic and political travails of any one country. Russia, Brazil and some Asian countries support the calls for currency reform but U.S. officials dismiss the idea. Zhou has reopened the debate on the global monetary standard.

Excessive movements in developed country currencies have provoked intervention by central banks. The Swiss National Bank has turned more aggressive in devaluing the Swiss franc above its 'line in the sand' circa 1.50 EUR/CHF by buying dollars as well as euros. Rapid depreciation of GBP versus G3 currencies has slowed, reducing risk of intervention by the BoE. Denmark's FX reserves rose to an all-time high in April 2009, leaving it ready to fight another DKK selloff as the Danish central bank closes its rate gap with the ECB.