Part of the reason world financial markets rebounded from their lows in February was the G20 summit in Shanghai, China, at the end of February 2016.
Sometimes these summits mark important turning points in financial markets because policymakers come out with a statement reassuring the markets. The funny thing about this summit: There was no big statement.
However, markets soon realized there must have been an unofficial agreement between the world’s biggest economies (the United States, China, Japan, and Europe) to end the currency wars or competitive devaluations of their currencies.
This was later dubbed the Shanghai Accord, akin to the New York Plaza Accord of 1985, which also ended volatility in currency markets and ushered in a secular bull market in stocks and bonds. Then as now, the world’s economic powers decided to let the dollar weaken against major trading partners to reduce the United States’ current account deficit (boosting U.S. exports) and ease dollar liquidity around the world.
Again, there was no official statement this time in Shanghai, but the major currency moves since Feb. 29, the last day of the summit, support this theory: The dollar is down 5.1 percent against the euro, 6.6 percent against the yen, 1 percent against the Chinese yuan, 5.4 percent against the pound, and—for good measure—7.3 percent against the Canadian dollar.
Of course, currencies don’t just move in a vacuum, and central bank action has supported the dollar weakness with the specific goal to ease dollar liquidity worldwide, the lack of which was responsible for the crunch in financial markets since the Fed raised rates for the first time in December 2015.
The Fed, for example, has not increased rates further, and other central banks have not increased their quantitative easing programs. But while the original Plaza accord lasted for years, the Shanghai accord may already be falling apart, even though none of the big economies seem to have broken it.
Australia Goes Against the Agreement
