David Morris

The G20 meeting of finance ministers and central bankers passed without incident, leading to a big sell-off in the US dollar yesterday, and a corresponding rally in everything else. There had been concern that member states would struggle to not criticise each other, escalating currency and trade tensions. The final communiqué was long and dull, but requested that members refrain from competitive currency devaluation. No doubt there were plenty of crossed fingers behind backs.

But it was always going to be the case that off-the-cuff comments would be more interesting, and so it proved to be. Japan’s finance minister Yoshida Noda threatened “bold action” to halt “a prolonged appreciation in the yen”. He had his bluff called straight away as the yen soared to a fresh 15-year high against the dollar. German finance minister Rainer Bruederle was more forthright, saying that he saw a second round of US quantitative easing as “the wrong way to go”. But it doesn’t look like he has Ben Bernanke’s ear.

There is now just over a week to go before the Fed makes its judgement on the size and scope of QE. The markets have been obsessing about further stimulus since the end of August and have fully discounted its arrival on 3 November. Given the rally in risk assets since early September, the view is that the Fed wouldn’t dare shy away from another round of monetisation now.

Most market participants are desperate to get this Fed meeting out of the way. While central bank interventions have been distorting markets since March 2009, the positive correlation across different financial instruments over the past three months has become frustrating for anyone wishing to diversify and spread risk. It doesn’t really matter what you trade, the prime catalyst for any significant price movement in anything is the US dollar. The threat of additional stimulus has seen the greenback plummet since the summer, and investors are hoping that the Fed will finally help to end the uncertainty and fix the size of QE once and for all.