Australia Economy Expanded Faster Than Forecast Last Quarter - Bloomberg -
Australia’s economy expanded faster than economists forecast last quarter as household spending and exports increased, sending the nation’s currency higher. — (Bloomberg)
NATO: Russia is violating Ukraine sovereignty - The Wall Street Journal - MarketWatch -
The meeting of the North Atlantic Council, consisting of the ambassadors to NATO of the 28 alliance nations, was called by Poland under the rarely invoked Article 4 of NATO’s founding treaty. That article states that allies can consult “whenever, in the opinion of any of them, the territorial integrity, political independence, or security of any of the parties is threatened.” - (Marketwatch)
Obama: Putin’s actions in Ukraine not fooling anybody - MarketWatch
Geneva Motor Show set to make tracks out of eurozones crisis -
New car registrations in the European Union slipped just 1.7 per cent last year, to 11.8 million cars sold, after five years of far more brutal falls.
The Geneva Motor Show will kick off this week on an optimistic note as the long-suffering European car market appears to finally have swerved out of the slow lane.
By how much remains to be seen: the most cautious observers expect sales to remain flat while the most optimistic are gearing up for three-per cent market growth. — (Khaleejtimes.com)
Japan, Indonesia to arrange defense, foreign ministers' meeting -
Japan and Indonesia agreed Saturday to convene a meeting of their defense and foreign ministers at an early date to enhance security ties, Japanese officials said.
Russian crisis budget forecasts declining growth, fiscal revenues, raising risk of increased energy sector taxation -
Published November ‘13
Russia’s stagnating economic growth will put increasing pressure on its spending commitments, and could raise the risk of tax increases should growth fall below expectations or if oil prices fall below USD85 per barrel.
In the face of a stagnating economy, the Russian government is forecasting that revenues will decline by 3.5% in 2014 and 7% in 2015 from previous projections.
The slower rates of GDP growth forecast by IHS would imply a reduced inflow of tax receipts to the federal and local budgets. At the same time, Russia faces large-scale investment needs to update and expand the country’s infrastructure. Additionally, Putin is pressing the government to deliver on his pre-election pledges for social spending and modernisation of the armed forces. Given the outlook for the economy, this suggests growing fiscal pressures. Currently, the oil and gas sector provides around one-half of all federal budget revenues.
Read the last sentence. Sure Putin can withhold gas exports to Europe, which accounts for 80% of Russian gas exports.
But the regime would be stepping in quicksand by doing so.
The ruble has been falling precipitously since mid-Jan. Russia’s central bank has had to raise rates and will adversely affect economic growth.
Slippage in economic growth and weaker energy prices pose the most significant risks to the 2014-2016 budget projections, which forecast the first annual deficits in nearly 15 years already. In the event of protracted economic weakness in the global economy, particularly in the EU, and softening energy prices, state revenue growth will underperform current projections significantly. A drop in oil prices to under USD85 per barrel and GDP growth lower than 3% are scenarios which we estimate as likely to result in severe revenue shortfall and associated cuts in benefits and social spending, which could in turn lead to increased civil unrest in the form of protests in major urban centres. In such an event, the government will have limited options assuming continued use of cautious monetary and fiscal policies. As a result it may well resort to increased corporate tax rates. - (IHS)
Slippage in economic growth is increasingly likely to happen. Meanwhile, weaker energy prices (or lower revenues if exports from gasprom stop)
Europe may be increasingly confident to call Russia’s bluff??:
If anything these continued threats will only put off purchasers of Russian gas. If your vendor is rude to you, you go to another vendor. If anything this situation makes the U.S. a more appealing option. Note that the America is either the largest or second largest nat gas produer in the world depending on which source and year one cites. I reserve the right to change my mind as I read more research, but for now, over the long-term, I think the deck is stacked against Russia.
Putin would be hard-pressed to escalate the situation.
Don't listen to Obama's Ukraine critics: he's not 'losing' â and it's not his fight -
In the days since Vladimir Putin sent Russian troops into the Crimea, it has been amateur hour back in Washington.
I don’t mean Barack Obama. He’s doing pretty much everything he can, with what are a very limited set of policy options at his disposal. No, I’m talking about the people who won’t stop weighing in on Obama’s lack of “action” in the Ukraine. Indeed, the sea of foreign policy punditry – already shark-infested – has reached new lows in fear-mongering, exaggerated doom-saying and a stunning inability to place global events in any rational historical context.
This would be a useful moment for Americans to have informed reporters, scholars and leaders explaining a crisis rapidly unfolding half a world away. Instead, we’ve already got all the usual suspect arguments:
Let’s start here with Julia Ioffe of the New Republic, a popular former reporter in Moscowwho now tells usthat Putin has sent troops into Crimea “because he can. That’s it, that’s all you need to know”. It’s as if things like regional interests, spheres of influence, geopolitics, coercive diplomacy and the potential loss of a key ally in Kiev (as well as miscalculation) are alien concepts for Russian leaders.
Overstated Rhetoric Shorn of Political Context
David Kramer, president of Freedom House, hit the ball out of the park on this frontwhen he hyperbolically declaredthat Obama’s response to Putin’s actions “will define his two terms in office” and “the future ofU.S. standing in the world”.
Honorable mention goes to Ian Bremmer of Eurasia Group forcalling this crisis“the most seismic geopolitical events since 9/11”. Putting aside the Iraq and Afghanistan wars, the Arab Spring, Syria’s civil war and tensions in the South China Sea, Bremmer might have a point.
Unhelpful Policy Recommendations
Admiral James Stavridis, former Supreme Commander of Nato, deserves a shout-out for calling on Nato to send maritime forces into the Black Sea, among other inflammatory steps. No danger of miscalculation or unnecessary provocation there. No, none at all.
Inappropriate Historical Analogies
So many to choose from here, but when youcompare seizing Crimea to the Nazi annexation of Austria in 1938, as Leonid Bershidsky did at Bloomberg View, you pretty much blow away the competition.
Making It All About Us
As in practically every international crisis, the pundit class seems able to view events solely through the prism of US actions, which best explains Edward Luce in the Financial Times writing that Obama needs to convince Putin “he will not be outfoxed”, or Scott Wilson at the Washington Postintimating that this is all a result of America pulling back from military adventurism. Shocking as it may seem, sometimes countries take actions based on how they view their interests, irrespective of who the US did or did not bomb.
Missing from this “analysis” about how Obama should respond is why Obama should respond. After all, the US has few strategic interests in the former Soviet Union and little ability to affect Russian decision-making.
Our interests lie in a stable Europe, and that’s why the US and its European allies created a containment structure that will ensure Russia’s territorial ambitions will remain quite limited. (It’s called Nato.) Even if the Russian military wasn’t a hollow shell of the once formidable Red Army, it’s not about to mess with a Nato country.
The US concerns vis-à-vis Russia are the concerns that affect actual US interests. Concerns like nuclear non-proliferation, or containing the Syrian civil war, or stopping Iran’s nuclear ambitions. Those are all areas where Moscow has played an occasionally useful role.
So while Obama may utilize political capital to ratify the Start treaty with Russia, he’s not going to extend it so save the Crimea. The territorial integrity of Ukraine is not nothing, but it’s hardly in the top tier of US policy concerns.
What isAmerica’s problem is ensuring that Russia pays a price for violating international law and the global norm against inter-state war.The formal suspension of a G8 summit in Sochi is a good first step. If Putin’s recalcitrance grows – and if he further escalates the crisis – then that pressure can be ratcheted up.
But this crisis is Putin’s Waterloo, not ours.
Which brings us to perhaps the most bizarre element of watching the Crimean situation unfold through a US-centric lens: the iron-clad certainty of the pundit class that Putin is winning and Obama is losing. The exact opposite is true.
Putin has initiated a conflict that will, quite obviously, result in greater diplomatic and political isolation as well as the potential for economic sanction. He’s compounded his loss of a key ally in Kiev by further enflaming Ukrainian nationalism, and his provocations could have a cascading effect in Europe by pushing countries that rely on Russia’s natural gas exports to look elsewhere for their energy needs. Putin is the leader of a country with a weak military, an under-performing economy and a host of social, environmental and health-related challenges. Seizing the Crimea will only make the problems facing Russia that much greater.
For Obama and the US, sure, there might be less Russian help on Syria going forward – not that there was much to begin with – and it could perhaps affect negotiations on Iran. But those issues are manageable. Meanwhile, Twitter and the opinion pages and the Sunday shows and too many blog posts that could be informative have been filled with an over-the-top notion: that failure to respond to Russia’s action will weaken America’s credibility with its key allies. To which I would ask: where are they gonna go? If anything, America’s key European allies are likely to fold the quickest, because, you know, gas. And why would any US ally in the Far East want Obama wasting his time on the Crimea anyway?
You don’t have to listen to the “do something” crowd. These are the same people who brought you the wars in Iraq and Afghanistan, among other greatest hits. These are armchair “experts” convinced that every international problem is a vital interest of the US; that the maintenance of “credibility” and “strength” is essential, and that any demonstration of “weakness” is a slippery slope to global anarchy and American obsolescence; and that being wrong and/or needlessly alarmist never loses one a seat at the table. — (theguardian)
For reference, here’s a list of NATO participants:
Head to Head: Fracking an economic boon; Keep drilling -
From the first test of the viability for fracking in Kansas in 1947, to large scale operations in the late 1960s, a debate over the environmental ramifications of fracking has been going for decades.
Opponents argue that increased seismic activity and groundwater contamination are a result of the extraction of natural gas or oil involved in fracking.While regulation has increased in many states, only two have made any effort to outlaw fracking entirely – and for good reason.
With energy and the economy both keys to American life, hydraulic fracturing, better known as “fracking,” provides a boost for both.Fracking can help to revive a stagnant oil industry in Kansas, not to mention the United States, with little downside reported to date.
According to the American Petroleum Institute, the United States will lose 45 percent of domesticnatural gas production and 17 percent of domestic oil production within 5 years without fracking.Many of these resources couldn’t be as inexpensively extracted using conventional methods, making a ban on fracking economically impractical now, and in the future.
The U.S., are enjoying the increased production. In December 2013, Bloomberg News reported that America increased production by a record pace of 18 percent in 12 months and is on pace to become the world’s largest producer of oil by 2015.
Aside from the positive impact on the economy and the job market, the same Reuters column reported that the Kansas Geological Survey has observed no adverse economic impacts of fracking in Kansas. In May 2012, the KGS published a report stating that, of the 244,000 vertical wells drilled in the state since 1947, 57,000 have been fracked with no noticeable ill-effects.
The U.S. Geological Survey offers more of the same ideas, stating that there is no evidence to suggest that the increase in seismic activity in Kansas and Oklahoma is due to fracking, as some have argued. In addition, the USGS also stated that wastewater is a product of oil production as a whole, and is independent of fracking. — (thecollegian)
Reshoring gives a boost to US manufacturers - Plastics News -
WESLEY CHAPEL, FLA. — Reshoring has added more than 100,000 jobs in the U.S. in the last three years — and the trend shows no signs of slowing down.
That’s the word from Harry Moser, founder of the Kildeer, Ill.-based Reshoring Initiative. Moser spoke Feb. 24 at the Plastics News Executive Forum in Wesley Chapel.
Even though China’s labor costs remain lower than the U.S., the gap isn’t as great anymore, Moser said. China’s labor supply also is tightening as a result of 35 years of that country’s one-child policy, added Moser, who has more than 40 years of manufacturing experience.
"A lot of good work went offshore, and [U.S.] companies followed each other like lemmings — it was herd behavior," he said. "They improved their margins, but their overhead and shipping got worse."
The number of U.S. jobs being added from reshoring each year now stands at 30-40,000 — roughly equal to the 30 [thousand] -50,000 jobs that are offshored each year. “We’ve stopped the bleeding,” Moser said.
In fact, Moser added, plastics and rubber is one of several “tipping point” industries, in which by 2015 it will make more economic sense to have products made in the U.S. than in China.
In 2013, 21 percent of large U.S. companies invested in reshoring — double the rate of 2012. According to a 2012 survey, 40 percent of contract manufacturers in the U.S. were doing reshoring work.
Although some arguments against reshoring continue — such as a shortage of skilled labor and experienced management in the U.S. and the cost of making the transition — Moser explained that many U.S. companies now can justify domestic investment in training and automation without sacrificing quality, delivery and time-to-market. — (Plasticsnews.com)
Reshoring of Manufacturing -
…some manufacturing units have been relocating back to the developed countries as these countries are once again looking attractive as manufacturing destinations. This relocation termed as ‘reshoring’ is expected to gain momentum in the future.
expansion of manufacturing has led to increase in wages in coastal regions in China and other offshore locations. At the same time, wages have stagnated or decreased in advanced economies. Again, natural calamities like the Japanese tsunami and the floods in Thailand have demonstrated the vulnerability of global supply chains. This has led some U.S. companies to move production back to the U.S.; they have restarted reshoring of production of computers and washing machines, according to McKinsey.
According to McKinsey Global Institute, manufacturing has a bright future and would expand in the advanced economies but in a different way. High-value added production will increase in the advanced economies.
At the same time, manufacturing is expected to increase in both low-income countries and middle-income countries.
Industries like textiles, apparel, toys and electronics assembly belong to this low-cost labor group. The jobs in these industries are the most globally tradeable and relocate to the areas that offer low wages of workers. Countries like Bangladesh, Vietnam and Cambodia have used their low-cost labor to become significant manufacturers in these types of industries. All the three countries are major textile and apparel producers and are expected to continue expanding these low-cost labor industries in their economies.
There are some industries for which proximity to demand is very important. Automobile manufacturing is an industry where this characteristic is very important. It is predicted that these types of industries will expand their manufacturing capacities in locations where demand is generated. Therefore, manufacturing employment in these countries that are usually middle-income countries is forecasted to increase. Countries like Brazil, India and China are expected to benefit in terms of employment from this type of manufacturing.
Even though they have a trade deficit in labor-intensive goods, advanced economies run a US$726 billion surplus in industries that require continuous innovation, according to McKinsey Global Institute. There are some manufacturing industries that require significant innovation and high-tech factories. Industries that use carbon fibre and nanomaterials are high-tech industries that also require highly skilled workers. Again, 3D printing is increasingly becoming popular, moving from a design tool to a means of production, according to McKinsey. All these industries are predicted to improve research and development, and the creation of new products. The high-tech factories would employ highly skilled workers who are mostly available in advanced economies. Due to improvements in technology and productivity, fewer workers may be required in these industries. However, there would still be demand for highly skilled workers. This is predicted to increase manufacturing employment in the advanced economies.
As the fiscal incentives are readjusted in the U.S. so as not to favour companies which opt for offshoring and give incentives to companies which produce in the U.S., the manufacturing companies may reshore some of the production. It may be more financially lucrative to manufacture in the U.S. than in the emerging economies. This may increase manufacturing’s contribution in the U.S. economy as well as increase employment. Backed by popular support to increase employment, reshoring is increasingly gaining momentum. Besides reshoring, there are five game changers for the U.S. economy as identified by McKinsey Global Institute. These are energy (shale gas exploration), trade, using digital information to raise productivity, improving infrastructure and human capital. Each of these game changers can increase U.S. GDP by at least $150 billion by 2020 while the potential may reach trillions of dollars. Again, the effect on employment would be remarkable. Energy, infrastructure and trade can each increase employment by 1.5 million.
Overall, manufacturing activity is expected to increase in the future due to a rise in the middle class all over the world. This will have a positive impact on employment in both developing and developed countries. High-tech manufacturing that require high skills level would employ more people in advanced economies. This would increase overall employment in the advanced economies. — (Huffington Post)
Tony Abbott to tread softly over China, Japan tensions on Asian trip -
Prime Minister Tony Abbott is planning to tread a fine diplomatic line between the increasingly complicated strategic interests of China and Japan and the trade possibilities for Australia when he embarks on his first foray into north Asia next month.
He said Australia had maintained a neutral position regarding disputed islands.
The trip, which will take in the South Korean capital, Seoul, will be Mr Abbott’s first major foreign policy venture not associated with an international conference.
Speaking exclusively to Fairfax Media, Mr Abbott said he wanted to push the message that Australia was under new management and open for business. He said the issues of economic improvement and the maintenance of peace were inextricably linked.
”The region’s remarkable economic development owes much to the strategic stability of recent decades,” he said. ”Australia will work with all our partners to ensure that this continues and that nothing jeopardises the region’s future peace and prosperity.
Mr Abbott’s approach differed in tone from the more strident comments of Foreign Affairs Minister Julie Bishop, who, several months ago, put noses out of joint by criticising the legal basis of Beijing’s declaration of a so-called ”air defence zone” over islands also being claimed by Japan.
”Australia has made clear its opposition to any coercive or unilateral actions to change the status quo in the East China Sea,” Ms Bishop said in November.
Relations with China have cooled since the change of government after former prime minister Julia Gillard signed a ”strategic partnership” with the nation. It ensured regular leadership dialogues and increased defence co-operation. However, Mr Abbott slowed that process by declaring Japan to be Australia’s best friend in Asia.
Mr Abbott said he was confident that a snub of Ms Bishop by Chinese officials last year, which raised eyebrows in the diplomatic community, was not representative of the broader relationship.
”I met with the Chinese ambassador a week or so back and he assured me that the Chinese government, at the very highest of levels, was looking forward to my trip,” Mr Abbott said.
”From time to time, there are always going to be issues but there is a fundamental strength in this relationship and I want to build on those strengths.”
Read more: http://www.smh.com.au/federal-politics/political-news/tony-abbott-to-tread-softly-over-china-japan-tensions-on-asian-trip-20140303-340jp.html#ixzz2v2B0eGfr
Reuniting the monetary union: a proposal to counter the eurozone’s imbalances | openDemocracy -
Persistent trade imbalances are threatening to derail the European economy. Luca Fantacci calls for a European Clearing Union to promote a sustainable pattern of production and consumption across the Eurozone.
For too long we relied on a diet of austerity as the only possible cure. But the treatment turned out to be ineffective, and even harmful, because it was based on the wrong diagnosis. Public debts were blamed, budgets were slashed, the recession deepened. Only recently has expert opinion acknowledged that public debts are, if anything, just part of a broader and different problem: foreign debts.
…since the introduction of the euro, some countries have accumulated trade surpluses year after year, while others have symmetrically accumulated deficits.
Until the outbreak of the crisis, these deficits were financed by an inflow of private capital: : loans from the “core” countries to the “periphery” were encouraged by the existence of the single currency, which eliminated exchange risk, as well as by the growing liquidity and integration of the European financial system.
The reluctance of foreigners to refinance the governments of Southern Europe resulted in a surge in interest rate differentials. The single currency was no longer the same in Greece and in Germany.
Only the intervention of the European Central Bank through unconventional refinancing operations allowed it to bring money back to the periphery, leading to a relative realignment in the costs of borrowing euros across the eurozone. However, these operations have merely bridged the gap, not closed it: the imbalance between surplus and deficit countries, in the absence of private capital, is financed through official channels, but it is still far from being reabsorbed.
This is because the money lent by the ECB to the periphery flows back towards the centre and here, instead of being spent abroad (helping to equalize the balance of payments) or inside (helping to adjust the real exchange rate), it is redeposited at the ECB. Thus, since 2007, surplus countries have accumulated a total of around 1,000 billion euros of credits with the ECB, while deficit countries have accumulated debts for an equivalent amount, within a clearing system called TARGET2 (T2).
What can be done, then, to reabsorb these imbalances? Firstly we need to acknowledge that symmetrical imbalances require symmetrical adjustments. …a country with a surplus ought to dispose of its credit, otherwise its obstinacy in selling without buying creates a deflationary pressure throughout the EU as a whole.
The principle of symmetrical adjustment was proposed by Keynes to reform the international monetary system after World War II. The idea was very simple. An International Clearing Union would act as a bank for the settlement of all payments related to international trade, and would finance temporary imbalances simply by crediting the account of the exporting country and debiting the account of the importing country. However, unlike a regular bank, the Clearing Union would charge an interest not only on debtor countries, but also on creditor countries, since it benefited both: the deficit countries, by allowing them temporarily to buy more than they would have otherwise afforded to buy; but also the surplus countries, by allowing them to sell more than they would otherwise have been able to sell. Moreover, the symmetric charges would act as an incentive for all countries to converge towards a balanced trade.
Keynes’s proposal was not adopted at the Bretton Woods conference that defined the postwar global economic order in 1944. Only a few years later, however, it was taken as a model for the creation of the European Payments Union. From 1950 and 1958, the EPU intermediated 75 per cent of commercial transactions between member countries, contributing significantly to the “economic miracles” of the time, like Italy and Germany, and to the beginning of the process of European integration.
Today, if it wants to complete and not to jeopardize that process, Europe needs a Clearing Union to reabsorb the imbalances that threaten to disrupt it. Target 2 is a clearing system, managed by the ECB, that could potentially serve this purpose. The problem is that, until now, it has managed to finance imbalances, but not to reduce them. In order to promote the convergence between surplus and deficit countries, Target 2 should be reformed according to the principles of the Clearing Union.
One possibility to put these principles into practice again today has been described in a recent paper by Bruni and Papetti. The proposal consists in creating a subset of Target 2, named for example Target 3, dedicated to recording commercial settlements between member countries. Target 3 would allow the ECB to stabilize the cost of funding trade between member states, taking it away from the uncertain conditions prevailing on capital markets. Moreover, in Target 3, as in Keynes’s Clearing Union, it would be possible to charge interest not only on debts, but also on credits. — (Our Kingdom)
Ukraine crisis prompts Poland to think again about euro The Wall Street Journal -
The Russian-Ukrainian conflict over Crimea may prompt Poland to rethink its stalled euro-adoption bid, because deeper integration with the European Union’s single-currency area may be necessary to anchor stability, the governor of Poland’s central bank said Monday.
Central-bank governor Marek Belka previously said he didn’t support a euro bid “in the foreseeable future” because Poland would lose monetary-policy tools by abandoning the zloty USDPLN -0.95% , although in the longer run, staying out of the currency bloc could prove politically difficult for the country.
But with Ukraine in turmoil, Belka’s latest comments showed a readiness for Poland to move closer to the European Union’s core, as a way of shielding itself from any future instability in Europe’s east. — (Marketwatch)
China Shows Bulls With $500 Billion Yuan Bets It’s in Charge -
Efforts by China to damp speculation in the yuan risks driving away investors just as the nation attempts to open up its capital markets in a once-in-a-generation economic overhaul.
Policy makers are moving to drive away speculators as President Xi Jinping seeks to liberalize interest rates, allow more room for the yuan to fluctuate and set up currency trading hubs around the world. Further price swings may squeeze bullish yuan bets that Deutsche Bank AG estimates at $500 billion.
“We are not used to volatility in the Chinese currency,” Jens Nordvig, the New York-based managing director of currency research at Nomura Holdings Inc., said yesterday in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene and Michael McKee. “It’s very painful for market participants because, in a low-volatility environment, it’s possible to carry large positions.”
China’s economic fundamentals are sound overall and it’s unlikely there will be large-scale outflows in the future, the State Administration of Foreign Exchange said in a statement today. The volatility seen of late is normal when compared with other currencies, and two-way movements in the exchange rate will be the norm, the watchdog said. Market participants shouldn’t “read too much” into the recent drop, it added.
“The statement serves to comfort the market that yuan declines won’t be excessive and investors have probably overreacted,” Banny Lam, Hong Kong-based co-head of research at Agricultural Bank of China International Securities Ltd., said by phone today.
The yuan’s weakness coincided with a drop in the benchmark seven-day repo rate to a nine-month low of 3.09 percent this week. That’s a sign of currency intervention as the People’s Bank of China bought dollars and sold yuan, adding cash to the financial system and bringing down interest rates, strategists at Bank of America Corp. wrote yesterday in a report.
“Whenever there’s been a sharp appreciation of the yuan, the PBOC always pulls it back a bit,” David Loevinger, a former senior coordinator for China affairs at the U.S. Treasury Department and now an analyst at money-management firm TCW Group Inc. in Los Angeles, said in a phone interview yesterday. “They want to inject two-way risk into the market and they want to shake out speculative inflows.”
Low volatility and currency appreciation added to the appeal of holding yuan-denominated assets for foreign investors. At 3.7 percent, yields on China’s two-year government notes are about 3.39 percentage points higher than U.S. Treasuries.
Yi Gang, the head of China’s foreign-exchange regulator and deputy central-bank governor, said Jan. 1 that authorities were considering imposing a tax on speculative flows. The PBOC said last week it plans to expand the band in which the yuan is allowed to trade in an “orderly” manner this year.
“The offshore hasn’t turned particularly bearish,” Harriss, who runs a $100 million yuan bond fund, said in a phone interview yesterday from London. “I don’t think the introduction of some volatility makes the yuan fundamentally unattractive.”
That sentiment is echoed by strategists at banks from Goldman Sachs Group Inc. to Morgan Stanley who expect yuan weakness to be transitory as export growth recovers. Rising volatility doesn’t necessarily foreshadow a shift in China’s currency policy favoring a weaker-exchange rate, they say.
“More depreciation? Probably not much more,” Yao Wei, a China economist at Societe Generale SA in Hong Kong, wrote in a research note yesterday. “Although the central bank does not like too much capital inflows, too much outflows will not be its choice, either.” — (Bloomberg)
Many interpretations of the latest move. What is important is that now it’s a game of maintaining confidence among investors.
A less benign view is that the PBoC finds itself with limited policy options. If it allows the yuan to depreciate more, investors will become skittish. Strong outflows could begin and weaken credit markets (or selling yuan would increase liquidity and allow the investment-led credit-thirsty model to continue). Meanwhile, allowing yuan to appreciate would increase the headwind currently inflicting economic pain.
Traders Reject Lagarde’s Warning as Volatility Falls: Currencies -
Currency traders are rejecting warnings from International Monetary Fund Managing Director Christine Lagarde that volatility will increase as the Federal Reserve pares its unprecedented stimulus program.
After peaking at a four-month high earlier this month, a measure of anticipated global price swings has fallen back to the lowest level since October, seven weeks before the U.S. central bank announced a cut in its bond purchases. Average implied volatility for the currencies of Brazil, India, Indonesia,South Africa and Turkey — which Morgan Stanley dubbed the “fragile five” last year because they’re vulnerable to capital flight — has fallen to the lowest in three months.
Traders are emboldened by forecasts that the U.S., the world’s largest economy, will grow at the fastest pace since 2005 this year and by the Fed’s pledge this month that it will taper stimulus in “measured steps.” Lagarde said in an interview after the Group-of-20 meeting at the weekend that increased volatility would be a “spillover” of the Fed’s actions.
“A jump in volatility starting from emerging markets is unlikely as long as the recovery in developed economies continues,” Yuji Kameoka, the chief currency strategist in Tokyo at Daiwa Securities Co., said in a Feb. 24 phone interview. “Once developed markets stabilize, global markets stabilize. And that’s a positive for emerging economies.”
While the worst winter storms to hit the U.S. in 31 years have depressed retail sales and employment growth, economists surveyed by Bloomberg surveys still expect the nation to lead the global recovery. America will grow 2.9 percent this year, surveys suggest, compared with an average 2.1 percent across the Group of 10 developed countries.
“A major driver of the spike in volatility was the shock factor,” Callum Henderson, the Singapore-based global head of foreign-exchange research at Standard Chartered Plc, said by phone on Feb. 24. “That has worn off, and the market has gotten used to the idea of tapering.”
“The rout in emerging markets was a temporary phenomenon,” Masashi Murata, a currency strategist in Tokyo at U.S. broker Brown Brothers Harriman & Co., said by phone yesterday. “Optimism is still strong. The recovery in developed countries is still in place, with the U.S. leading the way.” — (Bloomberg)