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from MacroScope:

Brazil’s capital controls and the law of unintended consequences

Brazilian economic policy is fast becoming a shining example of the law of unintended consequences. As activity fades and inflation picks up, the government has tried several different measures to fix the economy - and almost every time, it ended up creating surprise side-effects that made matters worse. Controls on gasoline prices tamed inflation, but opened a hole in the trade balance. Efforts to reduce electricity fares ended up curbing, not boosting, investment plans.

Perhaps that's the case with yesterday's surprise decision to scrap a key tax on foreign inflows into fixed-income investments. The so-called IOF tax was one of Brazil's main defenses in its currency war, making local bonds less appealing to speculators and helping prevent an excessive appreciation of the real.

As the Federal Reserve started to discuss tapering off its massive bond-buying stimulus, investors began to flock back to the United States. So with less need to impose capital controls, Brazil thought it would be a good idea to open its doors again to hot money. Analysts overall also welcomed the move, announced by Finance Minister Guido Mantega in a quick press conference on Tuesday, in which he said that excessive volatility is "not good" for markets and that Brazil was headed to a period of "lesser" intervention in currency markets.

So what happened in the first morning after the move?

Volatility spiked, with the real swinging from a 2 percent rise to a 1 percent drop within hours. The central bank came to the rescue, offering to sell as much as $2 billion in derivatives designed to curb currency losses. Although fewer capital controls are usually welcome in the long term, at first they boost volatility. That will only get worse if a U.S. payrolls report due Friday strenghtens the case for tapering off stimulus.

from Expert Zone:

Will the rupee fall further?

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

On May 31, the rupee fell to an 11-month low of 56.51 to the dollar. It wasn’t the only currency to suffer a loss. Most currencies depreciated during the month; some more than the others.

The appreciation of the dollar reflects an improvement in the performance of the U.S. economy and partly the related possibility of the phasing out of quantitative easing (QE) by the U.S. Federal Reserve. The latter would make the dollar even scarcer.

from MacroScope:

Brazil: Something’s got to give

How about living in a fast-growing economy with tame inflation, record-low interest rates, stable exchange rate and shrinking public debt. Sounds like paradise, doesn't it? But Brazil may be starting to realize that this is also impossible.

Inflation hit the highest monthly reading in nearly eight years in January, rising 0.86 percent from December. It also came close to the top-end of the official target, accelerating to a rise of 6.15 percent in the 12 months through January.

from Global Investing:

A yen for emerging markets

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Global Investing has written several times about Japanese mom-and-pop investors'  adventures in emerging markets. Most recently, we discussed how the new government's plan to prod the Bank of Japan into unlimited monetary easing could turn more Japanese into intrepid yield hunters.  Here's an update.

JP Morgan analysts calculate that EM-dedicated Japanese investment trusts, known as toshin, have seen inflows of $7 billion ever since the U.S. Fed announced its plan to embark on open-ended $40-billion-a-month money printing.  That's taken their assets under management to $67 billion. And in the week ended Jan 2, Japanese flows to emerging markets amounted to $234 million, they reckon. This should pick up once the yen debasement really gets going -- many are expecting a 100 yen per dollar exchange rate by end-2013  (it's currently at 88).

from Global Investing:

Is the rouble overhyped?

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For many months now the Russian rouble has been everyone's favourite currency. Thanks to all the interest it rose 4 percent against the dollar during the July-September quarter. How long can the love affair last?

It is easy to see why the rouble is in favour. The central bank last month raised interest rates to tame inflation and might do so again on Friday. The  implied yield on 12-month rouble/dollar forwards  is at 6 percent -- among the highest in emerging markets.  It has also been boosted by cash flowing into Russian local bond market, which is due to be liberalised in coming months. Above all, there is the oil price which usually gets a strong boost from Fed QE.  So despite worries about world growth, Brent crude prices are above $110 a barrel. Analysts at Barclays are among those who like the rouble, predicting it to hit 30.5 per dollar by end-2012, up from current levels of 31.12.

from Global Investing:

India rate cut clamour misses rupee’s fall-JPM

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Indian markets are rallying this week as they price in an interest rate cut at the Reserve Bank's June 18 meeting.  With the country still in shock after last week's 5.3 percent first quarter GDP growth print, it is easy to understand the clamour for rate cuts. After all, first quarter growth just a year ago was 9.2 percent.

Yet,  there may be little the RBI can do to kickstart growth and investment.  Many would argue the growth slowdown is not caused by tight monetary conditions but is down to supply constraints and macroeconomic risks --the government's inability to lift a raft of crippling subsidies has swollen the fiscal deficit to almost 6 percent while inhibitions on foreign investment in food processing and retail keep food prices volatile.  

from Global Investing:

Turkey gearing up for rate cuts but not today

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Could the Turkish central bank surprise markets again today?

Given its track record, few will dare to place firm bets on the outcome of today's meeting but the general reckoning for now is that the bank will keep borrowing and lending rates steady and signal no immediate change to its weekly repo rate of 5.75 percent. With year-on-year inflation in the double digits, logic would dictate there is no scope for an easier monetary policy.

But there are reasons to believe the Turkish central bank, whose mindset is essentially dovish, is letting its thoughts stray towards rate cuts. Consider the following:

from Global Investing:

Euro periphery: Lehman-type shock still on cards

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The passing of Greek austerity measures is fuelling a rally in peripheral debt today with Italian, Spanish and Portuguese yields falling across the curve.

However, one should not forget that peripheral economies are still under considerable risk of becoming the next Greece -- rising debt and weak economic growth pushing the country to seek a bailout -- as a result of tighter financial conditions.

from MacroScope:

Will U.S. criticism affect Japan’s FX stance?

Currency analysts are divided over whether U.S. criticism of Japan's forex policy will change Tokyo's currency stance. While some say it could raise the hurdle for further Japanese intervention, others think it might not have much impact. Rob Ryan, FX strategist at BNP Paribas in Singapore says the effect will be limited given uncertainty about the Japanese economy's outlook and current levels of dollar/yen and cross/yen pairs.

"I think if they (Japanese authorities) feel they have to intervene, they will intervene," Ryan says, adding that a dollar drop down to the "low 76s" might be enough to prompt further action from Japan.

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