Wednesday, January 29, 2014

UPDATE-1: Rate reversal hell: Canada may be left in the cold

Shit. I was asleep, got up for a smoke, and what do I see? "Turkey raises rates aggressively". Well that's interesting, I say to myself and because I simply can't wait for tomorrow when something like this peaks my interest I continue to probe. Turns out India, and Brazil, have done the same thing (though not as sharply). India's is very interesting.
India's central bank has unexpectedly raised interest rates in an attempt to rein in stubbornly high consumer prices in a crucial election year.

The Reserve Bank of India (RBI) raised the benchmark repo rate - the amount at which it charges to lend to commercial banks - to 8% from 7.75%.

Economists had expected no change after its meeting in Mumbai on Tuesday.

The RBI said that another near-term hike was unlikely if inflation eased to a more comfortable level.

India's main gauge of inflation, the wholesale price index (WPI), rose 6.16% in December, from a year earlier. While that was a slight fall on from the previous month, the rate continues to remain an issue with the central bank.
There may be no turning back now. You'll remember at the end of November and beginning of December (okay in all honesty unless you're really closely paying attention you probably won't remember) that the Chinese were going to be allowing their currency to rise and would be diversifying away from U.S. dollars. As I talked about yesterday they are still stockpiling gold like crazy.

In regards to the rising rates of emerging markets I've found an excellent analysis on it which I must recommend you all read, though I do want to clear up one point. In this analysis the author describes it as the monetary power of both the U.S. and China, and I believe that's incorrect. The U.S. taper is a response to China raising their rates. The U.S. has been strong armed into it and now the rest of the world is along for the ride.

Emerging markets forced to tighten by US and Chinese monetary superpowers
“We have all these countries in trouble like Argentina, Ukraine and Thailand that are each local cases, but behind the whole emerging market story is Fed tapering and worries about slowing Chinese growth,” said Lars Christensen from Danske Bank. “China is now a global monetary superpower, co-leader with the US. When China tightens, that hits trade and commodities across the world.”

Most analysts expect the Fed to continue tapering on Wednesday with a cut in bond purchases by another $10bn to $65bn a month, but there could be a surprise. Mr Jen said it is 50:50 whether the bank will retreat again after the global ructions that followed the previous decision to cut QE. “This meeting is a big test of the Fed’s courage. Anything can happen,” he said.

Turkey is in the latest country in the eye of the storm, no longer able to draw in enough foreign capital to cover a current account deficit of 7.5pc of GDP. Reserves have fallen to wafer-thin level of six weeks’ import cover. The ruling Islamic movement of Recep Tayyip Erdogan is deeply split, while the country faces mounting Sunni-Shia tensions due to a spillover from Syria.
I don't think the Fed has a choice, I now firmly believe they don't want to be tapering at all. If this is the case my original analysis this condition will be temporary is incorrect. Canada may now be terminally trapped with it's inflationary monetary policy needed to service more debt ever more cheaply without causing a serious economic collapse.

Our markets were never allowed to correct the same way other's in the "G7" did. This is why we perceive our condition as healthy when in fact we're just late to the party. If the rest of the world rapidly switches direction on interest rates I don't think Canada will be in a position to afford doing the same without seriously risking popping the numerous bubbles propping up our Ponzi-conomy.

If this is the case, we're in serious trouble. There is no bottom on how far our currency can now fall against the U.S. dollar and Chinese Yuan. If we don't raise rates rapid inflation is sure to follow.

Nigeria Central Bank to Shift Reserves Into Yuan From Dollars

The game is afoot, it's go time.


Great video on the situation. Notice the chart at 2:32 includes Canada.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for CenturyLink

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

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