G7 communiqués create risk. It may suggest a new policy direction or view on exchange rates by finance ministers and central bankers; consequently, it represents a unique foreign exchange risk which cannot be easily measured or modeled. There are limited events (communiqués) to review and there exists problems of interpretation with the wording. Communiqués without clear action steps only create noise.
The best form of communiqué is one of clarity with no surprises. Unfortunately, by definition that means that the message is anticipated and policies should continue as the status quo. By this measure, the current script was a good message.
The wording was not different from what was expressed in February, http://www.ustreas.gov/press/releases/hp350.htm. The dollar and yen should be firmer. Exchange rates should reflect fundamentals, (one sided bets like yen carry trades hsould be discouraged).Price stability continues to be a priority. Talk of global protectionsim is a potential issue, (let's get the Doha Round back on track).
Perhaps most important was what was not mentioned. There were no specific prescriptions for a cure of current account imbalances, although there was again a call for further action from large surplus countries like China. Some recommnedations on local bond market developments will come out after the Frankfurt meetings on May 9-10.
Uncertainty has been resolved and the policy status quo will continue. The focus of the exchange rate markets will be on growth differentials and not the behavior of financial ministers.
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