Managing Canada’s Recovery

As Canadian policy makers assess the ongoing economic recovery, they remain cognizant of the risks of returning to a tightening stance. Among them are the risks of attracting increased foreign capital inflows, which would drive the Canadian dollar to new highs, exacerbating the country’s competitiveness woes.

What Are the Financing Needs of the EZ Periphery?

Portugal’s financing needs can easily be covered by the existing umbrella of official resources, effectively amounting to about €470 billion-520 billion (comprising €255 billion from the AAA-country-backed European Financial Stability Facility (EFSF) or €288 based on 17.7/27=0.65 Irish loan-to-financing ratio + €60 billion from the European Financial Stability Mechanism (EFSM), as well as 50% of the aggregate EFSF/EFSM amount from the IMF), but everybody is well aware that the focus would immediately turn to Spain, for which the existing resources would be insufficient over three years, particularly if the banks’ unsecured short-term and maturing liabilities are included as well.

China: EU’s Knight?

In the news this week, China has pledged to continue to buy eurozone debt, particularly that of indebted periphery economies have been in the news this week, providing solace to some market actors. The remarks, which include Chinese government interest in the debt of the EFSF, as well as those of individual countries, especially Portugal, were largely made on the sidelines of the latest iteration of the EU-China high level trade meeting. These statements clearly make more exciting news than the usual fare at such meetings – EU officials also raised concerns about market access and the uncertain application of Chinese policies at a local level.

Can World Cup Frenzy Keep Qatar Growing After Gas Momentum Fades?

It’s a very big day for Qatar. As a long-time watcher of Russia and Qatar, among other hydrocarbon rich countries, the news that the countries will host consecutive world cups is really quite exciting. The decision is a leap of faith for FIFA, as the WSJ’s Matthew Futterman put it earlier today, as both countries still need a lot of infrastructure development.  As David Roberts notes, Qatar is set to be even more in the spotlight, including in some ways it may not like. Though, these are after all events that are eight and twelve years in the future.

Argentina’s Monthly Trade Balance (USD millions)

RGE expects the trade balance to register a US$1 billion surplus in October, compared with surpluses of US$1.15 billion in October 2009 and US$1.1 billion in September 2010, slightly shrinking the 12-month rolling basis trade surplus to US$13.97 billion from US$14.1 billion in September. Slowing demand from Brazil, despite high soft commodity prices, likely eased export growth to 34% y/y, while an over-stimulated and unsustainable domestic demand growth likely kept pushing imports up by 48% y/y.  

Mexico’s Central Bank May Cut Rates or Sell More Dollar Options

Mexico’s central bank (Banxico) Governor Agustin Carstens said that the Bank could cut rates or increase selling of U.S. dollar options (Banxico’s FX intervention mechanism), should massive short-term capital inflows derive from the U.S. Fed’s quantitative easing, announced on November 3. Carstens also said that at the moment, the Mexican peso (MXN) is not overvalued. Although in the past, the stance of Mexican authorities did not show particular concerns about excessive currency appreciation, this verbal intervention by Carstens shows the same potential risks to the MXN as to the rest of Latin American currencies. The MXN has appreciated 5% year-to-date, a relatively small amount when compared with other Latin American currencies, aided by a monthly US$600 million option sale program by Banxico in order to accumulate reserves, a negative output gap, flat monetary policy rate, and security concerns.

What’s the Outlook for U.S. Ethanol Subsidies?

With the Republican Party now holding a majority in the House, deficit hawks may get the upper hand, allowing existing ethanol subsidies to expire as the focus shifts to whether or not to extend the Bush tax cuts. A scenario in which minority Democrats and corn belt Republicans exert pressure to extend lower ethanol subsidies is possible. In the current climate, one in which job creation is a priority, it is highly unlikely that the ethanol import tariff would be dropped, with the prospect of a flood of cheap ethanol imports from Brazil too great. Nevertheless, a discussion on import tariffs would likely include a discussion on subsidies. The mandated annual increase in the volume of biofuels to be used for transportation will drive demand for ethanol with or without ethanol subsidies.

Iceland: Capital Control Relaxation Postponed

Iceland’s central bank governor stated on November 3, 2010, that there will be no fundamental changes to the current capital control regime before March 2011. The same day, Iceland’s central bank lowered its interest rates by 75 basis points, causing a drop in bond yields. Yields also fell as capital moved into bonds, given the longer-than-expected restrictions on investing abroad. Based on the central bank’s earlier communication, many investors believed controls would be relaxed shortly after the third IMF review, which took place in late September.

Eurozone: Exchange Rates and Imbalances

Since 2000, the U.S. dollar has experienced two broad instances of real exchange rate depreciation. One was during the dot-com recession and the second was during the global boom phase from 2005 until the financial crisis triggered a sizable flight to safety and an unwinding of the yen-carry trade. The chart below shows that on both occasions, the eurozone bore a sizable share of the adjustment (the ULC-based REER series show a similar picture for all economies but data for China is unavailable). China’s U.S. dollar peg was loosened somewhat in 2006-7 but the re-pegging in 2008 led it to share in the flight to safety surge of the dollar.  Within the single currency bloc, Germany was better able to keep its ground in contrast to the periphery countries, which resulted in the widening of intra-EMU imbalances.