Intelligentguess

The US Dollar gets into a free fall against most other assets after a Chinese official hints at diversifying deployment of reserves into stronger currencies

• The Euro sped past 1.47. It appears it’s only a matter of time we see 1.50
• Crude nudges $100 per barrel. Still a little short of it but not much
• Gold goes past $845 /oz and is within reach of an all time high of $850 / oz

I could go on and on….

Amidst all this we see some evidence of decoupling

The Australian Central Bank raised interest rates today. The ECB is expected to maintain a hawkish stance on monetary policy
Amidst all this the Reserve Bank of India has announced that it has loaded up on more ammunition to defend the Indian Rupee against the deluge of dollar flows. The ceiling for issuance of Market Stabilisation (or MSS) bonds has been raised to INR 2.5 trn. That’s almost two times the gross yearly government borrowing (in other words the fiscal deficit).

It’s time they realise that such measures only add to the flows, emboldening potential investors of the near surety that the currency would not depreciate. In addition it allows them to test the limits of the abilities of the central bankers in managing these flows.

It’s time RBI realises that these measures are an exercise in futility.

Remember the “Impossible Trinity“.

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Goods as a % of GDP

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Goods and Services as a % of GDP

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Balance of payments ( BOP) as a % of GDP

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UK - Trade as a % of GDP (click on image for a larger visual)

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USA - Trade as a % of GDP (click on image for a larger visual)

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The US Bureau of Labour Statistics released the latest CPI data for January today.

The overall CPI came in slightly higher than expected. However, most the increased contribution came from abnormally large increases in the indexes for medical care and food. With analysts reckoning these to be of lesser importance (for the Fed), markets seemed to shrug off the higher headline number.

An interesting observation comes in a footnote in the BLS press release

“Effective with this release, index levels are now published to three decimal places. Percent changes based on these three-decimal place indexes will continue to be published to one decimal place.”

So, the Americans are going to make their data more precise!

While this removes the problem of rounding off errors, how accurate will the data become - only time will tell.

There is no doubt that economic data coming out of the US is of a far higher quality - the move to make it more precise will only improve it further - than, say, India, China or Russia. Coming to think of it, these are the very countries many expect to stand tall in the coming global economic order.

It’s, probably, high time that these (and other) countries start paying attention to the quality and reliability of their economic data. Hopefully, the American move to set their own bar higher would act as a catalyst (or should I say wake up call) for others.

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Andy Mukherjee of Bloomberg has recently written an opinion piece highlighting the recent recommendations on the Yuan Carry trade made by an investment bank, which if implemented, has an impact on the Indian fx markets too.

Surprisingly, since the recommendation surfaced, the trade has become even more attractive with the cost of shorting yuan remaining more or less static while the rupee forward premia implied interest rate based on the NDF forwards has moved higher reflecting an increased rate of return.

The world is, surely, changing in increasingly unthought of ways. Who would have thought a highly controlled currency of a growing economy could be used to execute carry trades?

(Link via email from E N Venkat of Lazard India)

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