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Notes From Underground: BOE, check; ECB, check; Bank of Korea Raises

Jan. 14, 2011 10:58 AM ETEU-OLD
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By Yra

As expected, the U.K. and the Trichet-led ECB held rate steady. The surprise was the South Korean Bank raising rates 25 basis points to 2.75 percent. Yet the markets, although purportedly surprised, did very little with the WON. More interesting for the currency markets was Trichet’s statement that the ECB was concerned about inflationary pressures within the EU. This on a day when Greek unemployment rose to more than 13 percent. Mr.Trichet, will you ever learn? The markets have just allowed the EU to phony up the Spanish and Portuguese DEBT auctions and before the DOLLAR can even try to rally, Trichet plays the INFLATION card. Really, with an overall European unemployment rate of 10 percent, do the ECB policy makers not believe in output gaps, and, of course, NAIRU?

It is time for Dr. Bernanke and Dr. Yellen to make a house call on their European brethren. The motto of the ECB as coined by its first president, Wim Duisenberg, is “WE HEAR BUT WE DO NOT LISTEN.” The markets listened and wound up bidding the EURO currency up against the DOLLAR and all other currencies. The market was very short EUROs and caught off guard by Trichet’s stridency on inflation. At the same time, the FED was further put on the defensive by the JOBLESS CLAIMS DATA. The markets had been anticipating a number around 400,000 but the actual number increased from last week’s, rising to 445,000. This puts a pause to the FED‘s positive economic outlook for the JOBS picture is just not improving enough to back the doves at the FED off the QE agenda.


While Trichet fights INFLATION, Bernanke is trying to prevent DEFLATION and strive to adhere to the FED’s DUAL MANDATE. Mervyn King and the Bank of England is caught between the ECB and the FED. Inflation numbers in the U.K. are rising but with the austerity promised by the Cameron government, the BOE is afraid of moving too quickly to head off inflation and therefore chose to keep in place the 200-billion-pound QE program. The POUND rallied even as the BOE stayed soft, and, as I thought yesterday, was more a reaction to the U.S. DOLLAR than anything else.
Next week, Hu Jintao visits Washington and, amazingly, the Chinese currency has risen to the highest levels since January 1994. Geithner has been talking about the need for China to allow its currency to appreciate for its own benefit. He told the Chinese that a strong currency would help curtail domestic inflation pressures and work to prevent a damaging rise in asset prices. The rhetoric is very calm and thankfully lacks the stridency of some others in Congress. Geithner also explained to China that its currency policy was having a negative effect on other emerging markets. Finally, Brazil and the U.S. have found something to agree on. Now how about those ethanol subsidies and tariffs?
Also, Mr. Geithner, as long as you are warning about the weak YUAN and its effect on Chinese asset prices, you may want to stop by the FED and have a conversation with Mr. Bernanke about THE PORTFOLIO BALANCE CHANNEL and the FED‘s view of the WEALTH EFFECT. Just looking for some consistency in a very unbalanced world.



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