G20 Currency Commitments

Finance policymakers and representatives from central banks across the G20 came to an agreement about sharing currency policies at the latest G20 meeting in Shanghai

Key players in global finance from the 20 biggest economies met in Shanghai at the end of February to discuss policy measures to improve the flagging global economy. Currency risk to global markets was an important topic for discussion, with the G20 contingent reaching an agreement to exchange currency policies and keep each other informed in advance when policy decisions are made that could have a significant impact on the strength and rates of global currencies.

Currency policy activities in China and Japan were of particular concern to world finance leaders, in light of the Chinese currency devaluation in order to boost the economy that took place in 2015 and took the markets and exchange rates by surprise. At that time, the largest yuan depreciation in 20 years, alongside the then strength of the US dollar, meant heavy losses in real terms for global businesses, with a significant reduction in margin for those US businesses relying on exporting to China. A company without an appropriate risk management or currency hedging strategy could have realistically lost $37,036 in just two days on a transaction buying $1,000,000, from 10th-12th August 2015.

Leading policymakers, such as the Dutch Finance Minister, Jeroen Dijsselbloem, voiced their concerns about other countries following suit and the threat of potential future currency devaluations to markets and economies worldwide. The Chinese Prime Minister, Li Keqiang, made a point of reassuring the other group members that there would not be a direct repeat of the events in August 2015, which had a dramatic effect on global markets in the opening discussions on 26th February, saying that there was no basis for continued depreciation of the Chinese currency.

The agreement reached at the summit sets a framework for countries within the G20 to collaborate and consult on currency policies, but does not as yet take the form of a particular strategy or set line to follow. The focus was on transparency, closer communication and the exchange of key information between nations, and the International Monetary Fund (IMF) will also have a part to play in reducing currency risk, participating in ongoing communications and information sharing on currency and monetary policy.

Written by Rachael Kinsella | 01/03/2016