Friday, April 20, 2012

EURUSD Update - IMF & G20 In Focus

Fixing, containing, solving, ending (pick your adjective) the financial crisis is in center stage today as dual meetings among global leaders are taking place.  In Mexico, Foreign Ministers are gathered for G20 Meetings, while in Washington, the IMF is conducting its gathering.  The goal of both meetings is increasing funds towards the IMF’s Bailout Fund.  In Washington, IMF Leader Christine Legarde has set a $400 billion target of new funds.  Currently though, pledges of only around $300 billion have been raised which falls well below the IMF’s goal, and is nearly 50% less than Germany was hoping to raise.

The big driver of the need for fresh funds was last week’s renewed fears towards Spain’s banking sector.  With public debt levels rising, combined with a greater than 20% unemployment rate, Spanish banks are vulnerable to rising delinquencies on their lending.  As such, investors have been pushing for troubled financial firms to raise capital to avoid bankruptcy.  With many institutions being unable to tap the private markets though, expectations have risen that the Spanish government will need to step in and recapitalize its banks.  Such a move could than cause Spanish budget shortfalls. As such, Spanisg debt yields have risen on anticipation of a weaker Spanish government and economy.

For the EURUSD, this has caused the pair to trade at the whims of rumors, rising when new countries were  reported as willing to pledge funds to the IMF, and falling when it seems that the total will be well short of the $400 billion target.  The final tally from the meetings will probably occur during the weekend.  Therefore, Forex traders may need to wait until next before we see a trend form in the EURUSD.

More on the urgency of the current G-20 & IMF Meetings from Bloomberg:
Europe’s governments were told the onus for fixing their debt woes lies with them as the Group of 20 warned the two-year crisis still threatens global growth.
With finance chiefs from the G-20 meeting today in Washington, those from Canada and Australia joined the IMF and U.S. in pressing Europe to intensify efforts to quell the turmoil as it spreads to Spain. The G-20 cited “the situation in Europe” first in a list of drags on the world economy, according to a draft statement obtained by Bloomberg News.
As she welcomed pledges of about $320 billion for the IMF’s crisis-fighting coffers, IMF Managing Director Christine Lagarde said the lender serves as an emergency backstop and that Europe must protect itself, boost economic growth and cut debt. Italian and Spanish bonds fell yesterday on speculation the crisis is worsening.
“Countries have to take measures,” Lagarde told Bloomberg Television’s “InBusiness With Margaret Brennan” in Washington. “I am in charge of improving the stability and I need to have the umbrella in case the clouds break into a nasty rain.”
Lagarde is seeking more than $400 billion in new reserves to increase a lending capacity of about $380 billion and this week won promises of support from Japan to Denmark. She wants the money to help insulate the international economy from dangers such as European contagion, high unemployment and rising oil prices.  Read More

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