This piece was written before Christmas and will appear in the first 2010 edition of the Forex Journal. The data covers the market up until mid December.
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Old Maid is a card game where the simple task is to avoid holding a given card (often the queen of spades) at the end. Even in the company of good friends however, holding Old Maid at the end is not fun. Often, you have to buy the drinks, drop a piece of clothes, or endure other travails. And as it turns out, the global FX market is not unlike this good old game of cards where the Old Maid is proxied by having a strong currency on whose shoulders the correction of global macroeconomic imbalances must invariably fall. In this way, and although one sometimes get the feeling that everyone believes that everybody may actually export their way out of their current misery, buying one country’s currency means selling another and thus, someone (be it an individual economy or a group/basket of economies) must end up holding Old Maid.
The discussion on global imbalances has many faces, but in the context of currency fluctuations and FX markets the focus tends, one way or the other, to gravitate towards the need for the US dollar to fall. This was evident before the crisis and still is. However, if this seems obvious to the most ardent dollar bears as well as to those who still see a structurally important role for the buck going forward, it has been far less evident who should pick up the slack if the dollar is to correct to the new global fundamentals. In this way, key emerging economies are still pegging their currency to the green back and in general; while most claim to see the benefit of a strong currency they just don’t want it to be their currency.
This is really a follow-up on my earlier piece today and my last 2009 piece on Eurozone imbalances and internal devaluation. In particular, I want to point you towards two things. Firstly, Edward has, no doubt after a long hard thought, come to the conclusion that Greece should be sent to the IMF or rather that it is ok to ask the fund for help in order credibly sort out the mess in Greece (and possibly Spain). This is not news as such since the proposition of sending ailing Eurozone countries to the IMF has been on the table for a while now. The main question basically is, as it has always been, whether the program proposed by Greece in conjunction with the EU and set in relation to what ever we might have left of the stability and growth pact (SGP) is really credible as a working solution.
Meanwhile, Danske Bank had a very interesting research note out today by economists Gustav Smidth and Frank Øland Hansen on the sovereign situation in the Eurozone and the potential for correcting not only in the immediate short term (i.e. preventing a collapse), but more importantly how to get debt to GDP ratios back on a solid footing within, let us say, a decade or so. As it turns out this is very difficult.
I am rushing this week so I won't have time for long and analytical pieces (no doubt to the joy of many :)), but I would be remiss if I did not point out this one for my readers which highlights the predicament Greece currently finds itself in even if a private bid is not significant in itself.
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