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from Morning Bid with David Gaffen:

Speak softly, and carry a big helicopter

Days like Wednesday are the ones that remind investors why the Federal Reserve is what it is, and how some believe the other world central banks cannot compete, even as some expect the European Central Bank and Bank of Japan (to an extent) to take up the slack the Fed will leave behind when it ends quantitative easing in the next weeks and prepares for its first interest-rate hike some time in the third quarter.

The odds on that hike, by the way, shifted late Wednesday after the Fed's minutes showed there was concern about moving policy too quickly. It’s the pace of increases that worries the Fed, not the idea of doing it at all. The Fed is likely to push rates to about 50 basis points either in July or September (the market is betting on September now, the Fed is probably thinking July), but it’s important to keep in mind that the monetary policy committee is not going to then start doing the one-move-per-meeting thing they did in the last rate-hiking cycle back in the Pre-Cambrian Era.

Fedbondbuying

Thursday will see a round robin of central banker speak: The ECB’s Mario Draghi delivers remarks on developments in Europe and global central banking and then takes part in a moderated discussion with Federal Reserve Vice Chairman Stanley Fischer, at the Brookings Institution. Separately, Bank of Japan Governor Haruhiko Kuroda spoke at the Economic Club of New York on Wednesday, and both central bankers would be forgiven for saying they’ve only got so much they can do to help everyone out here - even though Kuroda did say the BOJ has plenty of options if it wanted to ease policy further.

Draghi’s various “whatever it takes” promises just don’t carry the same weight as a big helicopter full of U.S. greenback, and Jens Nordvig of Nomura has the figures to prove it. He says in commentary that the markets are moving into the second stage of the dollar’s gains, one where markets will continue to see elevated levels of volatility because the ECB and BoJ aren’t going to be able to make up for the Fed’s largesse on the monetary front.

from Breakingviews:

Just ditch forward guidance

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Central banks’ forward guidance provides modest gains with significant risks. That judgment, already common among economists, has just received an authoritative endorsement from the Bank for International Settlements. The implication is that this policy experiment should be abandoned.

from MacroScope:

Japan-style deflation in Europe getting harder to dismiss

To most people, the idea of falling prices sounds like a good thing. But it poses serious economic and financial risks - just ask the Japanese, who only now finally have the upper hand in a 20-year battle to drag their economy out of deflation.

That front is shifting westward, to the euro zone.

Deflation tempts consumers to postpone spending and businesses to delay investment because they expect prices to be lower in the future. This slows growth and puts upward pressure on unemployment. It also increases the real debt burden of debtors, from consumers to companies to governments.

from Anatole Kaletsky:

Behind the wave of market anxiety

What has caused the sudden anxiety attack that overwhelmed financial markets after the New Year? We may find out the answer at 8.30 on Friday morning, Eastern Standard Time.

Almost all agree that the market turmoil has been linked to alarming events in several emerging economies -- including Turkey, Thailand, Argentina and Ukraine -- that has spilled over into concerns about more important economies, such as China, Russia, South Africa, Indonesia and Brazil.

from MacroScope:

A week before emerging-market turmoil, a prescient exchange on just how much the Fed cares

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The last seven days has been a glaring example of fallout from the cross-border carry trade. That's the sort of trade, well known in currency markets, where investors borrow funds in low-rate countries and invest them in higher-rate ones. Some $4 trillion is estimated to have flooded into emerging markets since the 2008 financial crisis to profit off the ultra accommodate policies of the U.S. Federal Reserve, Bank of Japan, European Central Bank and the Bank of England. Now that central banks in developed economies are looking to reverse course and eventually raise rates, that carry trade is unraveling fast, resulting in the brutal sell-off in emerging markets such as Turkey and Argentina over the last week.

The Fed's decision on Wednesday to keep cutting its stimulus effectively ignores the turmoil in such developing countries. And while the Fed may well be right not to overreact, it makes one wonder just how much attention major central banks pay to the carry trade and its global effects -- and it brings to mind a prescient exchange between some of the brightest lights of western economics, just a week before emerging markets were to run off the rails.

from MacroScope:

Shock now clearly trumps transparency in central bank policymaking

The days of guided monetary policy, telegraphed by central banks and priced in by markets in advance, are probably coming to an end if recent decisions around the world are any guide.

From Turkey, which hiked its overnight lending rate by an astonishing 425 basis points in an emergency meeting on Tuesday, to India which delivered a surprise repo rate hike a day earlier, central banks are increasingly looking to "shock and awe" markets into submission with their policy decisions.

from Breakingviews:

ECB might be the most effective big central bank

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Of the world’s three most important central banks, which one is doing the best job? Of course, it’s too early to tell - the distinguished economist Alan Blinder may now regret describing Alan Greenspan as “the greatest central banker who ever lived” in 2005. But there’s a good case that the European Central Bank under Mario Draghi deserves the prize.

from Breakingviews:

Monetary policy similarity outweighs divergence

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The policies of the world’s major central banks are about to diverge. That matters far more to financial markets than to the real economy.

from Global Investing:

Watanabes shop for Brazilian real, Mexican peso

Are Mr and Mrs Watanabe preparing to return to emerging markets in a big way?

Mom and pop Japanese investors, collectively been dubbed the Watanabes, last month snapped up a large volume of uridashi bonds (bonds in foreign currencies marketed to small-time Japanese investors),  and sales of Brazilian real uridashi rose last month to the highest since July 2010, Barclays analysts say, citing official data.

Just to remind ourselves, the Watanabes have made a name for themselves as canny players of the interest rate arbitrage between the yen and various high-yield currencies. The real was a red-hot favourite and their frantic uridashi purchases in 2007 and 2009-2011 was partly behind Brazil's decision to slap curbs on incoming capital. Their ardour has cooled in the past two years but the trade is far from dead.

from Anatole Kaletsky:

After initial promise, Japan’s new economy risks backsliding

At a time when economic optimism is growing and stock markets are hitting new highs almost daily, it is worth asking what could go wrong for the global economy in the year or two ahead. The standard response, now that a war with Iran or a euro breakup is off the agenda, is that some kind of new financial bubble could be about to burst in the U.S. But a very different, and rather more plausible, threat is looming on the other side of the world.

Japan is the world’s third-biggest economy, with national output roughly equal to France, Italy, Spain, Portugal and Greece combined. This year, Japan has become, very unusually, a leader in terms of financial prosperity and economic growth. According to the latest IMF forecasts, Japan’s 2 percent growth rate in 2013 will be the fastest among the G7 countries, easily outpacing the next strongest economies, Canada and the U.S., each with 1.6 percent growth. Japan’s stock market has gained 70 percent since last December, far exceeding the 25 percent bull market on Wall Street, and Japan’s corporate profits are projected to increase by 17 percent, according to Consensus Economics, compared with the paltry gains of 3 to 4 percent in Germany and the U.S.

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