MacroScope

The Bank of Canada is probably not ready to seriously consider cutting rates — yet

With all signs showing the Canadian economic miracle is fading, the Bank of Canada is understandably starting to sound more dovish. The Canadian dollar has got a whiff of that, down about 10 percent from where it was this time last year.

But that doesn’t mean Governor Stephen Poloz is ready to signal on Wednesday that his rate shears are about to get hauled out of the shed.

Yes, economic growth is expected to be restrained over the next couple of quarters, the long-awaited pick up in exports and business investment still seems elusive and inflation continues to remain undesirably weak.

Even the last monthly jobs report, which tends to be volatile, was a bit of a shock, showing nearly 46,000 job losses during the month when every forecaster was expecting net hiring.

But an overheated housing market built on a mountain of household debt – one of the highest per capita in the world – doesn’t need more stimulus from even lower rates.

from Global Investing:

Market cap of EM debt indices still rising

It wasn't a good year for emerging market bonds, with all three main debt benchmarks posting negative returns for the first time since 2008. But the benchmark indices run by JPMorgan nevertheless saw a modest increase in market capitalisation, and assets of the funds that benchmark to these indices also rose.

JPMorgan says its index family -- comprising EMBI Global dollar bond indices, the CEMBI group listing corporate debt and the GBI-EM index of local currency emerging bonds -- ended 2013 with a combined market cap of $2.8 trillion, a 2 percent increase from end-2012. Take a look at the following graphic which shows the rise in the market cap since 2001:

Last year's rise was clearly much slower than during previous years.  It was driven mainly by the boom in corporate bonds, which witnessed record $350 billion-plus issuance last year, taking the market cap of the CEMBI to $716 billion compared to $620 billion at the end of 2012, JPM said.

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.

With the Bank of Japan's money-printing keeping the yen weak and pushing down yields on domestic bonds, it is no surprise that the Watanabes are buying more foreign assets. But if their favourites last year were euro zone bonds (France was an especially big winner)  they seem to be turning back towards emerging markets, lured possibly by the improvement in economic growth and the rising interest rates in some countries. And Brazil has removed those capital controls.

from Global Investing:

The hryvnia is all right

The fate of Ukraine's hryvnia currency hangs by a thread. Will that thread break?

The hryvnia's crawling peg has so far held as the central bank has dipped steadily into its reserves to support it. But the reserves are dwindling and political unrest is growing. Forwards markets are therefore betting on quite a sizeable depreciation  (See graphic below from brokerage Exotix).

 

The thing to remember is that the key to avoiding a messy devaluation lies not with the central bank but with a country's households. As countless emerging market crises over decades have shown, currency crises occur when people lose trust in their currency and leadership, withdraw their savings from banks and convert them into hard currency.  That is something no central bank can fight. Now Ukraine's households hold over $50 billion in bank deposits, according to calculations by Exotix. Of this a third is in hard currency (that's without counting deposits by companies).  But despite all the ruckus there is no sign of long queues outside banks or currency exchange points, scenes familiar to emerging market watchers.

Why is the Reserve Bank of India so quiet on the rupee?

 

When nobody’s listening, sometimes it pays to shout from the rooftops.

Based on the rupee’s daily pasting, the Reserve Bank of India might do well to look to the European Central Bank’s strong verbal defense of the euro just over a year ago.

In July last year ECB President Mario Draghi declared he would do “whatever it takes” to safeguard the euro’s existence.

That unexpectedly candid comment, uttered at a moment of rising market tension, wasn’t followed by concrete policy action. But markets took heed.

Does less QE from the Fed necessarily mean a stronger dollar?

Based on the latest U.S. Treasury flows data, it may be time to ditch the textbook theory that says less monetary stimulus means a stronger currency – at least for now.

The problem may just be that the theory doesn’t fully account for the situation when your largest creditors – and they are very large – are trying to beat you to the market.

The Federal Reserve first hinted in May it would start reducing its bond purchase programme because the U.S. economy is recovering and so is the job market.

Brazil’s foreign reserves are not all that big

Traumatized by several currency crises in the past, Brazil has made a dedicated effort in recent years to amass $374 billion in foreign reserves as China bought mountains of its iron ore and soybeans. When the next crisis came, policymakers figured, the reserves would act as Brazil’s first line of defense.

It turns out that those reserves, which jumped from just $50 billion in 2006, may still not be large enough, Bank of America-Merrill Lynch analysts found in a report on the increased volatility in foreign exchange markets as the U.S. Federal Reserve prepares to scale back part of its monetary stimulus.

Using central bank monthly data on the stock of foreign investments in Brazil, David Beker and Claudio Irigoyen estimated that foreigners hold about $1.2 trillion in Brazil. While most ($785 billion) of that amount consists in longer-term direct investments, portfolio investments such as equities and debt still far exceed the central bank’s reserve cushion at $415 billion.

Bank of England on the money with its 1982 vision of a “less cash” society

The Bank of England has a fairly dubious record of forecasting the UK economy, but 30 years ago it was right about one thing – how our use of cash would change.

A look through the Bank’s publications archive, uploaded to its website on Tuesday and going back to 1947, reveals all sorts of historical curios – not least its handling of Nazi gold in 1939

Another is a 1982 report on why demand for cash was growing far more slowly than expected, which at the time was hard to reconcile with a widespread belief that the black economy was on the rise.

India seeks to entice yield-seeking investors in a tapering world

 

India’s concerted effort to shore up the battered rupee over the past two weeks has had one goal in mind: raising currency-adjusted yields to a level where even investors wary of a withdrawal of cheap money from the U.S. would still buy emerging market assets. The central bank has raised overnight money market rates by more than 300 basis points – a spate of tightening not seen since early 2008 – and sharply inverted the swap and the bond yield curve in less than two weeks.

From an offshore perspective, FX implied yields have jumped from a chunky 6 percent last month to well over 8 percent this week. But the risk-reward has not come cheap. For all the pain caused in the world of domestic interest rates, the Indian rupee has barely edged higher. Part of the reason is the Reserve Bank of India’s sledgehammer steps last week have been offset by other actions taken by the central bank and conflicting talk from government officials assuring lenders – the biggest players in the domestic bond markets – that these measures are temporary.

While New Delhi and Mumbai seem to be at last reading from the same page on communications policy this week, there seem to be two scenarios evolving. The first and more optimistic option is that bond investors give the thumbs up to the RBI’s steps and start shoveling money again into the markets after taking nearly $8 billion out of bonds since June.

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.