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U.S. Economic Outlook

January 29, 2010
The US economy expanded by an eye-popping 5.7% pace in Q4 09, according to the government's initial estimate, the fastest in six years. The slower pace of de stocking, contributed about 3.4 percentage points to GDP. Consumer spending rose at a 2% clip, a bit better than expected, but off the 2.8% pace seen in Q3 09 that was boosted by the cash…
U.S. Economic Outlook U.S. Economic Outlook Reviewed by magonomics on January 29, 2010 Rating: 5
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January in Retrospect, February in Prospect

January 29, 2010
One of the forces that we expected to emerge in January was an unwinding of some of the trends seen in December. This force was evident in parts of the foreign exchange market. The poorest performing currency against the dollar in December was the Japanese yen. It lost a little more than 7% in December. In January it was the best performing curren…
January in Retrospect, February in Prospect January in Retrospect, February in Prospect Reviewed by magonomics on January 29, 2010 Rating: 5
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Policy Dilemma Crystalizes in Spain

January 29, 2010
Greece has drawn investors' ire, but it is in Spain today where the policy dilemma is most stark.
Today Spain reported that its unemployment rate in Q4 rose to 18.8% from 17.9% in Q3. The consensus was for a rise toward 18.5%. The unemployment rate has doubled in the past two years. As seems to be typical in Europe, the unemployment challenge …
Policy Dilemma Crystalizes in Spain Policy Dilemma Crystalizes in Spain Reviewed by magonomics on January 29, 2010 Rating: 5
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Japan Data and Flows

January 28, 2010
In recent weeks several investment houses and observers have suggested the attractiveness of Japanese shares. It is difficult as is often the case that what came first the upgraded assessments or the flows. The fact of the matter is, drawing from MOF data, foreign investors have been net buyers of Japanese shares for nine consecutive weeks through…
Japan Data and Flows Japan Data and Flows Reviewed by magonomics on January 28, 2010 Rating: 5
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We suspect many observers are exaggerating the hawkishness of the FOMC statement We suspect many observers are exaggerating the hawkishness of the FOMC statement Reviewed by magonomics on January 28, 2010 Rating: 5
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More Thoughts on the Fed

January 27, 2010
In my first take I said nothing about Hoenig's dissent and that is what many in the market are talking about. I did not think it was all that important primarily because it was not the typical kind of dissent when the FOMC would vote to keep rates on hold and a member would disagree, wanting to say cut rates. Hoenig's dissent was over futu…
More Thoughts on the Fed More Thoughts on the Fed Reviewed by magonomics on January 27, 2010 Rating: 5
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Fed Stays the Course

January 27, 2010
The FOMC left rates on hold and in general stayed the course. The long-term asset program was not extended and conditions were such that the FOMC expected rates to remain low for an extended period of time. Surprisingly, there was one dissent on this phrase from new voting member and known hawk, Hoenig. Hoenig argued the phrase "extended peri…
Fed Stays the Course Fed Stays the Course Reviewed by magonomics on January 27, 2010 Rating: 5
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Greek Woes Push European Currencies Lower, Yen Higher

January 27, 2010
Sharp pressure on Greek debt instruments and, to a lesser extent, the other weak credits in the region,is pressuring the European currencies lower, with the euro stopped cold in its tracks before $1.4100 was reached and is now headed toward the lows. Optionality struck near $1.40 may try to contain the down ticks for the next hour, but a break of …
Greek Woes Push European Currencies Lower, Yen Higher Greek Woes Push European Currencies Lower, Yen Higher Reviewed by magonomics on January 27, 2010 Rating: 5
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Pressure on Portugal Increases, What Will Socrates Do ?

January 27, 2010
The reprieve on Greek bonds after the successful placement of 5-year bonds (at a hefty premium to existing 5-year bonds) was short-lived. Benchmark 10-year yields are up 23 bp today, while 2-year yields are up 32 bp, bring the total increase over the past five sessions to 71 bp and 62 bp respectively.
In contrast, the pressure on Portugal is consi…
Pressure on Portugal Increases, What Will Socrates Do ? Pressure on Portugal Increases, What Will Socrates Do ? Reviewed by magonomics on January 27, 2010 Rating: 5
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Outlook FOMC

January 26, 2010
The FOMC will conclude its two-day meeting on Wednesday and we do not expect a substantive change in its economic or inflation assessments. Nor do we think its guidance that conditions will likely "warrant exceptionally low interest rates for an extended period of time."
Even though the December non-farm payrolls report disappointed, it i…
Outlook FOMC Outlook FOMC Reviewed by magonomics on January 26, 2010 Rating: 5
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Peru Tax Part of Trend ?

January 26, 2010
Last year Brazil imposed a 2% tax on BRL purchases related to fixed income and equity purchases. Taiwan took steps to discourage foreign investors from parking funds in short-term instruments, which it saw as speculation in currency appreciation. Starting this week Peru's 30% tax on foreign investors profits from short-term (up to 60 days) cur…
Peru Tax Part of Trend ? Peru Tax Part of Trend ? Reviewed by magonomics on January 26, 2010 Rating: 5
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China Reserves

January 26, 2010
Local press reports have emphasized the Chinese sliding reserve requirement. The explosion of new bank lending (reports suggest CNY1.45 trillion or ~$212 bln) in the first three weeks of the year appears to have slowed considerably under the administrative measures. There is some speculation that Chinese officials seek to tighten their control by …
China Reserves China Reserves Reviewed by magonomics on January 26, 2010 Rating: 5
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Key Drivers in Foreign Exchange Market

January 25, 2010
With fresh developments light on the ground today, it may be worthwhile to take a step back and re-examine the key drivers of the foreign exchange market.
Last week saw the emergence of a new factor that seemed to eclipse or at least mitigate the impact of the other drivers. Previously problems in deficit issues in Europe and efforts by China to …
Key Drivers in Foreign Exchange Market Key Drivers in Foreign Exchange Market Reviewed by magonomics on January 25, 2010 Rating: 5
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Bonds Today

January 25, 2010
The better appetite for risk today and supply concerns are weighing on sovereign bond markets. Japanese and European 10-year yields are 1-2 bp higher today. The US Treasury will sell $118 bln of coupons this week. While 10-year yield spreads within the euro zone today are largely steady, pressure on Greece remains evident in the 2-year sector, whe…
Bonds Today Bonds Today Reviewed by magonomics on January 25, 2010 Rating: 5
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Equities Today

January 25, 2010
Asian equities took the lead from Friday’s sharp losses in North America, with the MSCI Asia Pacific Index falling 0.7%. Its losing streak has extended to the sixth session, during which time it has lost about 4.3%, leaving it up less than 1% on the year. Telecoms, financials and basic materials offered the downside leadership. Ongoing concerns ab…
Equities Today Equities Today Reviewed by magonomics on January 25, 2010 Rating: 5
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Currencies Today

January 25, 2010
The US dollar is mixed with a downside bias today. It is losing ground against the euro and sterling, but is trading higher against the Japanese yen. With new assurances over the weekend, the fear of the politicization of the Federal Reserve and Chairman Bernanke’s re-confirmation has eased and risk averseness is waning. The yen may also be pressu…
Currencies Today Currencies Today Reviewed by magonomics on January 25, 2010 Rating: 5
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Bernanke Confirmation Vote Update

January 22, 2010
The media is noting that procedural maneuvering is frustrating attempts to hold the Senate vote on the confirmation of Bernanke's appointment for a second term as Fed Chairman. Some reports claim that the Republicans are considering a filibuster. Even though Bernanke is a self-identified Republican and was initially appointed by a Republican p…
Bernanke Confirmation Vote Update Bernanke Confirmation Vote Update Reviewed by magonomics on January 22, 2010 Rating: 5
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What Ails Greece Ails Europe

January 22, 2010
Greece lies at the center of Europe’s maelstrom. The proximate trigger was the election of a new government last October that had the audacity to reveal a deep dark secret—Greece’s deficit was three times larger than previously acknowledged.

Prime Minister George Papandreou was contrite and has cobbled together a general plan, effectively revers…
What Ails Greece Ails Europe What Ails Greece Ails Europe Reviewed by magonomics on January 22, 2010 Rating: 5
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Swiss Intervention

January 21, 2010
A more modest theme in the FX market has been the strength of the Swiss franc against the euro (~3% since mid-Dec). Recall the quantitative easing strategy the SNB pursued included blocking CHF appreciation through intervention and the purchase of foreign (dollar and euro) bonds. The franc has appreciated through the top end of the range the SNB w…
Swiss Intervention Swiss Intervention Reviewed by magonomics on January 21, 2010 Rating: 5
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Aussie Losses Exaggerated

January 21, 2010
The Australian dollar has been hit by the broad dollar recovery and weakness in commodities, which may be partly linked to the risk of further tightening of monetary conditions in China. There is another factor that may be taking a toll. Local papers report that Ken Henry, the Secretary to the Treasury, is recommending a tax reform in Australia th…
Aussie Losses Exaggerated Aussie Losses Exaggerated Reviewed by magonomics on January 21, 2010 Rating: 5
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Price Action Indicates Dollar Advance is not Over

January 21, 2010
The relatively shallow pullback in the dollar was greeted with renewed buying and this would suggest the dollar's recovery is not over. At the moment the foreign exchange market does not appear to be driven by economic data. The Greek crisis is not simply about Greece but uncovers a fissure at the very heart of EMU. Is monetary union really su…
Price Action Indicates Dollar Advance is not Over Price Action Indicates Dollar Advance is not Over Reviewed by magonomics on January 21, 2010 Rating: 5
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Euro Slide not Sufficient for French Prime Minister

January 20, 2010
Earlier today, French Prime Minister Fillon reiterated recent remarks by other French officials bemoaning the euro's strength against the dollar. The euro has slid almost 6.75% against the US dollar since late November. The euro's setback means that over the past six months it is essentially flat (-0.71% according to Bloomberg data).
Fillo…
Euro Slide not Sufficient for French Prime Minister Euro Slide not Sufficient for French Prime Minister Reviewed by magonomics on January 20, 2010 Rating: 5
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Greek: Tragedy or Farce?

January 20, 2010
Moody's may have called the Greek fiscal proposals "relatively well designed" (though it did keep its negative outlook), but the market is voting with its feet and in a big way today with the Greek 2-year note yield jumping 62 bp and the 10-year yield rising 18 bp. The Greek bond market had begun the year on a firmer note after the s…
Greek: Tragedy or Farce? Greek: Tragedy or Farce? Reviewed by magonomics on January 20, 2010 Rating: 5
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Be Prepared for Softening of US Housing Data

January 19, 2010
Tertiary reports are warning of renewed weakness in the US housing sector. Today the NAHB Housing Market Index was reported. This little watched survey of home builders tracks present sales, 6-month sales expectations and traffic of prospective buyers (of single family homes). The index ranges from 1 to 100. It most recently peaked in Sept 09 at 1…
Be Prepared for Softening of US Housing Data Be Prepared for Softening of US Housing Data Reviewed by magonomics on January 19, 2010 Rating: 5
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Greece Update

January 19, 2010
Greek 2-year and 10-year bonds are holding in fine today, with the spread against Germany narrowing around 5 bp today. Pressure has intensified in recent days as European support seems half-hearted. Some officials have criticized Greece for relying on one-off measures to cut 10 bln euros from this year's budget, and suggesting that Greece may …
Greece Update Greece Update Reviewed by magonomics on January 19, 2010 Rating: 5
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Korea Won Vulnerable Near-Term

January 19, 2010
The underlying economic fundamentals in Korea remain constructive, but the near-term outlook for the currency is less favorable. The dollar is trading to carve out a base near KWR1120 and near-term potential extends toward KRW1140-KRW1150. Contacts report that the central bank intervention is likely to have greater sway as foreign investor demand …
Korea Won Vulnerable Near-Term Korea Won Vulnerable Near-Term Reviewed by magonomics on January 19, 2010 Rating: 5
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China

January 19, 2010
China's central bank has raised the benchmark 1-year bill rate for the second consecutive week. The 8 bp increase to 1.926% matches last week's increase. Between August 2009 and last week, the 1-year bill rate was steady. This coupled with last week's reserve ratio increase and anticipation that China will report double digit growth in…
China China Reviewed by magonomics on January 19, 2010 Rating: 5
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Yen Likely Won't be Moved by Funding Scandal

January 15, 2010
News that a second aide to DPJ's Secretary General and king maker Ichiro Ozawa has been arrested in a political funding scandal is not likely to weaken the yen, which is little changed on the day in the NY morning.
Ozawa does not have a public office, but is seen as the power behind the throne. It is possible that Ozawa is called before parlia…
Yen Likely Won't be Moved by Funding Scandal Yen Likely Won't be Moved by Funding Scandal Reviewed by magonomics on January 15, 2010 Rating: 5
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Thoughts on How the ECB and US Data may Impact the Dollar

January 14, 2010
The ECB meeting and press conference are unlikely to provide fresh incentives to the market. The ECB is clearly on hold for a few more quarters ate least. The Q&A will be the more interesting, but even here Trichet is unlikely to make any revelations. The ECB is notably reluctant to promise any support to the weaker members. But none of those …
Thoughts on How the ECB and US Data may Impact the Dollar Thoughts on How the ECB and US Data may Impact the Dollar Reviewed by magonomics on January 14, 2010 Rating: 5
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Thoughts on an (unlikely) exit for EMU

January 13, 2010
There have been more talk in recent days that a current member of EMU will look for an exit. Greece is serving as the lightening rod, with 10-year bond yields soaring 23 bp today. Many observers have referring to the risk as being in the PIIGS countries-- (Portugal, Italy, Ireland and Greece).
Some of the market talk focuses on the near-term--this…
Thoughts on an (unlikely) exit for EMU Thoughts on an (unlikely) exit for EMU Reviewed by magonomics on January 13, 2010 Rating: 5
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New Lows in 3m Euro Vol; Spring Coiling for Big Spot Move?

January 13, 2010
Three month implied euro volatility, which is the benchmark in the options market, has fallen today to reach its lowest level since Sept 2008. At 10.59% it has dropped about 2 percentage points this year.
Even if one does not trade currency options, the option market may help in the price discovery process in the spot market. On one hand the decli…
New Lows in 3m Euro Vol; Spring Coiling for Big Spot Move? New Lows in 3m Euro Vol; Spring Coiling for Big Spot Move? Reviewed by magonomics on January 13, 2010 Rating: 5
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Greek Woes Underscore Risk Aversion Theme Today

January 12, 2010
Three separate developments underscore the risk aversion theme today: Disappointing Alcoa earnings to kick off the US earnings season, the continued snugging of Chinese rates, including a 50 bp hike in reserve requirements (for large banks), and new worries about the outlook for Greece.
The EU has raised questions over the credibility of Greek mac…
Greek Woes Underscore Risk Aversion Theme Today Greek Woes Underscore Risk Aversion Theme Today Reviewed by magonomics on January 12, 2010 Rating: 5
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Strength of Krone and Prospects Higher Norwegian Rates

January 11, 2010
Norway is the only major European country to hike rates last year and did so twice in H2 09. The central bank indicated after the Dec rate hike that if the krone appreciates more than expected, it could delay or limit further rate hikes. The krone has rallied about 3.25% on a trade-weighted basis over the past few weeks, during which time the euro…
Strength of Krone and Prospects Higher Norwegian Rates Strength of Krone and Prospects Higher Norwegian Rates Reviewed by magonomics on January 11, 2010 Rating: 5
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Australia Outlook Updated

January 11, 2010
Neutral sounding Reserve Bank Australia comments after an unprecedented three rate hikes in consecutive meetings had helped encourage a wave of profit-taking that saw the Australian dollar lose about 6.4% against the US dollar in the first 3 weeks of December. However, over the past couple of weeks Australia has reported a series of stronger than …
Australia Outlook Updated Australia Outlook Updated Reviewed by magonomics on January 11, 2010 Rating: 5
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The Dollar

January 11, 2010
In terms of market positioning We have argued that the dollar’s rally in December largely reflected short-covering ahead of year end, upon which momentum traders jumped aboard and that it would come off again early in the New Year. The IMM Commitment of Traders positioning is not comprehensive and in others ways flawed, but it does seem somewhat r…
The Dollar The Dollar Reviewed by magonomics on January 11, 2010 Rating: 5
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China

January 11, 2010
At the end of last year, China reported that its CPI had turned positive from a year over-over-basis. Deflation had ended. Last week, the PBOC allowed the three month bill yield to rise for the first time. This small nuanced move, that will likely be reaffirmed with the 1-year bill sale this week, is a small token move and of greater symbolism tha…
China China Reviewed by magonomics on January 11, 2010 Rating: 5
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Germany

January 11, 2010
The German economy, and by extension, the euro zone economy as well, appears to have lost momentum in Q4 09. Last week’s data for Germany included news of a 1.1% fall in Nov retail sales. The market had expected a 0.3% rise. Factory orders for that month fell 0.2%. The consensus had been for a 1.5% increase. The wider trade surplus was a small ref…
Germany Germany Reviewed by magonomics on January 11, 2010 Rating: 5
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Japan Finance Minister

January 11, 2010
A new finance minister in Japan has jettisoned the DPJ’s strong yen policy. The move back to the LDP’s position reflects the deflationary concerns and the more pro-business arm of the DPJ getting an upper hand within the party. The dollar had already appreciated nearly 10% from the late Nov lows against the yen before Kan spoke about how businesse…
Japan Finance Minister Japan Finance Minister Reviewed by magonomics on January 11, 2010 Rating: 5
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US Labor Markets

January 11, 2010
The US labor market recovery continues to be slow, but it is taking place. In H1 2009, the US lost an average of 559k jobs a month and in H2 the average job loss was 134k. The average job loss in Q4 was 69k vs 199k in Q3. Looking ahead, weather-induced job losses should help boost numbers, even here in January. The bulk of the 1.15 mln Census Dept…
US Labor Markets US Labor Markets Reviewed by magonomics on January 11, 2010 Rating: 5
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Re-Orientation: Russia Looks East

January 08, 2010
In 1869 the U.S. completed the transcontinental railroad. With shipping interest in the Atlantic and Pacific Oceans, the partners of Brown Brothers, one of the key investment banks of the period, understood the golden spike as linking Europe and Asia. A little more than a century later, the center of gravity in the world economy has shifted. Since…
Re-Orientation: Russia Looks East Re-Orientation: Russia Looks East Reviewed by magonomics on January 08, 2010 Rating: 5
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Post Job Thoughts

January 08, 2010
No doubt the jobs data disappointed and the market positioning was clearly leaning the wrong way. That the dollar has dropped is not that surprising--we thought that was the risk regardless of the data--but rather the greenback's resiliency the far. The euro has not risen above yesterday's high $1.4450 and this is an important level that n…
Post Job Thoughts Post Job Thoughts Reviewed by magonomics on January 08, 2010 Rating: 5
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China

January 07, 2010
The People's Bank of China snugged policy today by selling 3-month T-bills yielding 4 bp more (1.3684%) than has prevailed since mid-Aug 2009. Nuances are often important. This is not regarded as an equivalent of a rate hike, though next week's sales of benchmark 1-year bills will also likely reflect today's move. In a report out yeste…
China China Reviewed by magonomics on January 07, 2010 Rating: 5
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Canadian Reserves and the Diversification Dilemma

January 06, 2010
Canada reports its international reserves on a weekly basis and today it reported the figures for the week ending Dec 31. The US absorbs a little more than 80% of Canada's exports. While this would seem to offer a prima facia case for not diversifying reserves, Canada has long diversified its reserves.
Canada's reserve assets include dolla…
Canadian Reserves and the Diversification Dilemma Canadian Reserves and the Diversification Dilemma Reviewed by magonomics on January 06, 2010 Rating: 5
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Outlook for BoE and Sterling

January 06, 2010
The two day meeting of the BOE's Monetary Policy Committee has begun. There is practically no chance of a change in rates or in its asset purchase program. Nevertheless the meeting provides a timely opportunity to review the outlook for UK monetary policy.
The last MPC meeting was December 9th-10th. With no dissent, it left the bank rate at 50…
Outlook for BoE and Sterling Outlook for BoE and Sterling Reviewed by magonomics on January 06, 2010 Rating: 5
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Euro Movers: Correlations Reviewed

January 06, 2010
There has been much talk in recent weeks that risk-on/risk-off trades, in which many instruments seemed to be highly correlated, may be breaking down. We have taken a fresh look at our correlation matrix. At a proxy we look at the correlations with the euro. We run our correlations on percentage change as we believe it is a more robust approach.
W…
Euro Movers: Correlations Reviewed Euro Movers: Correlations Reviewed Reviewed by magonomics on January 06, 2010 Rating: 5
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Taiwan Officials Getting Serious about FX Speculation

January 05, 2010
Taiwan officials have tried to discourage speculation on its currency, but to little avail. The Taiwanese dollar rose to its best level against the US dollar since Q3 2008 yesterday before pulling back a bit, amid some scattered talk of possible central bank intervention.
Today the central bank announced that foreign investors have a week to use f…
Taiwan Officials Getting Serious about FX Speculation Taiwan Officials Getting Serious about FX Speculation Reviewed by magonomics on January 05, 2010 Rating: 5
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Thinking About Fed Funds

January 04, 2010
The weighted (by volume) average of Fed funds on New Year's eve was 5 bp. The range that day briefly touched the lower end of the 0-25 bp target for the first time since the end of Q3. Throughout Q4 09, the effective Fed funds rate was very stable between 11 and 13 bp--the middle of the target range.
Recall that the Fed funds futures settle at…
Thinking About Fed Funds Thinking About Fed Funds Reviewed by magonomics on January 04, 2010 Rating: 5
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Latest Reserve Composition Data

January 04, 2010
The most authoritative source for data on the currency allocation of central bank reserves comes from the IMF and it is reported at the end of a quarter for the preceeding quarter. At the end of last week the IMF published Q3 reserve data.
Central banks held $7.5 trillion in reserves at the end of Q3 a $334 bln rise over the quarter and a $446 bln …
Latest Reserve Composition Data Latest Reserve Composition Data Reviewed by magonomics on January 04, 2010 Rating: 5
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