Currencies - Stronger VS Weaker. Which is better

As recently as last month, governments of emerging economies from South Africa to Brazil warned that competitive devaluations might be needed to keep their strengthening currencies from stifling economic growth.

Now, talk of currency controls is being abandoned and interest rates are rising as record food prices and oil at $100 a barrel make inflation the bigger threat. That means developing nations will keep outperforming in the foreign-exchange market, according to Morgan Stanley.

South Africa’s finance minister and Indonesia’s deputy central bank governor said last week that stronger currencies may quell rising prices. Russia’s finance minister said Feb. 21 the central bank will favor a “very flexible” exchange rate. Brazil Finance Minister Guido Mantega, who spoke of a “currency war” in September when he pledged to buy dollars to curb the real, declared a “truce” two months later. Peru, China, Colombia, Indonesia and Russia raised interest rates this month.

“If your main macro-economic problem shifts from one of too weak growth to one of too high inflation, then that is going to lead you to look at tightening monetary policy,” said Jens Nordvig, a managing director of currency research at Nomura Holdings Inc. in New York. “The quickest way to put a cap on inflation is to look at ways that would strengthen your currency.”

Turmoil, Commodities

Protests in Egypt, Bahrain, Libya and Tunisia drove oil above $100 a barrel in New York for the first time since October 2008, raising concern that energy prices will spark inflation. An index of 55 food commodities climbed 3.5 percent in January from a month earlier to a record 231 points, the United Nations’ Food and Agriculture Organization said Feb. 3.

Economists at Barclays Capital estimated in a report dated Feb. 25 that inflation is accelerating at a 6 percent rate in emerging economies, compared with less than 2 percent in developed nations.

After noting in October the rand was “overvalued,” South Africa’s Finance MinisterPravin Gordhan said Feb. 23 that a “rapid” weakening may fuel inflation. His comments were echoed a day later by Indonesian central bank Deputy Governor Hartadi Sarwono, who said policy makers will let the rupiah strengthen to help keep prices in check.

Brazil Rates

Brazil raised its main interest rate on Jan. 19 for the first time since July, just two months after Mantega said the real had reached a “reasonable” level. Bank of Thailand Governor Prasarn Trairatvorakul said Jan. 26 that rates will need to rise to damp inflation even after policy makers boosted them for a fourth time in seven months on Jan. 12.

“Emerging economies, especially in Asia, are facing significant domestic inflationary pressures, which you see in wages and prices,” said Gabriel de Kock, head of foreign- exchange strategy in New York at Morgan Stanley. Food and energy costs are also experiencing “significant upward shocks” as international commodity prices surge, he said.

Morgan Stanley favors the ruble, Mexican peso and the ringgit as investors speculate that central banks in commodity- producing countries such as Russia, Mexico and Malaysia will boost rates, according to a Feb. 4 report from a team of strategists led by Rashique Rahman in London.

The ringgit will appreciate 9 percent this year to 2.8 per dollar, while the Colombian peso will gain about 11 percent, the New York bank forecasts. The Malaysian currency will end the year at 2.96 per dollar, from 3.0525 today, according to the median estimate of 18 analysts surveyed by Bloomberg. Colombia’s peso will be at 1,850 by the fourth quarter, from 1,907.15 last week, a separate survey showed.

Weaker Currencies

Most emerging-market currencies fell last week as turmoil in Africa and the Middle East led investors to seek safer assets. The ringgit lost 0.6 percent, with the peso weakening 1.2 percent to 1,898.75. South Korea’s won depreciated 1.3 percent to 1,126.45 and the real declined 0.4 percent to 1.6684.

Developing-nation currencies rallied in the past two years as interest rates at about zero in the U.S. and Japan encouraged investors to seek higher-yielding alternatives. The gains were led by the rand’s 44 percent surge versus the dollar.

Emerging nations may still balk at abandoning capital controls, even as they boost rates to combat inflation, said Jan Loeys, chief market strategist at JPMorgan Chase & Co. in New York. Colombia’s Banco de la Republica said Feb. 25 it will extend daily dollar purchases in the local market for at least three more months to limit the peso’s gains after it unexpectedly raised interest rates for the first time in 10 meetings.

‘Countries Worried’

“Countries are worried that if they let their currencies appreciate that would just be like waving a red flag in front of the bull, which is the global capital investor,” he said. “They are trying to tighten domestically while trying to avoid that they have massive capital inflows.”

Sweden shows that growing economies can withstand stronger currencies if their exports are competitive. The economy may expand 4.05 percent this year, according to the median estimate of 10 economists surveyed by Bloomberg, even after the krona appreciated 6.7 percent in the past six months, the most in a basket of 10 developed-nation currencies as measured by Bloomberg Correlation-Weighted Currency Indexes.

Soaring energy prices threaten to slow the global recovery and stoke inflation. In the U.S., an extended $10 increase in oil cuts 0.5 percentage point off growth over two years, according to Deutsche Bank AG. Crude soared to $112.14 a barrel in London last week, the highest close since August 2008.

‘Supply-Side Shock’

“When you have the potential for a big supply-side shock, which has the potential to compromise economic growth, then allowing your currency to appreciate isn’t necessarily a good thing,” said Alan Ruskin, global head of Group-of-10 foreign- exchange strategy at Deutsche Bank in New York.

Investors pulled $1.9 billion from developing nation stock mutual funds in the week to Feb. 23, the fifth week of outflows, according to EPFR Global data cited by Citigroup Inc. on Feb. 25.

“You don’t need to worry about stopping inflows when they’re not there anymore,” said Fiona Lake, an economist at Goldman Sachs Group Inc. in Hong Kong.

While emerging-market leaders blame foreign-exchange appreciation on the Federal Reserve’s policy of printing money to buy bonds and keeping rates at almost zero, Treasury Secretary Timothy F. Geithner said at the Group of 20 meeting this month in Paris that trade imbalances have kept currencies of nations such as China“substantially undervalued.”

Yuan Appreciation

China’s yuan has strengthened 4.2 percent since mid-2008 to 6.5750 per dollar even as gross domestic product expanded 10.3 percent last year, 9.2 percent in 2009 and 9.6 percent a year earlier and has now surpassed the economy of Japan to become the world’s second-largest.

Developing countries most reliant on imported oil will be among the first to increase rates, said Luis Costa, an emerging- markets strategist in London at Citigroup. These nations are susceptible to sudden commodity price jumps, with fuel and mining products accounting for about 36 percent of South Korea’s imports, 25 percent in China, 27 percent for Turkey and 24 percent for Indonesia, the New York-based bank estimates.

“Countries like Turkey that are big importers of inflation can’t afford to keep pursuing loose monetary policy and exchange-rate depreciation,” Costa said. Turkey’s central bank left its main rate unchanged on Feb. 15 after two months of cuts to assess whether curbs on lending are reducing consumer demand.

Russia’s Bank Rossii won’t seek to stem ruble gains and will favor a “very flexible” exchange-rate policy to help contain inflation, Finance Minister Alexei Kudrin said Feb. 21. The Finance Ministry and the central bank may keep inflation from exceeding the government’s goal of 7 to 8 percent, he said.

“Emerging markets are scared of inflation, especially food and energy inflation, so there’s merit in allowing their currencies to appreciate,” said Werner Gey van Pittius, part of a team overseeing about $70 billion in assets at Investec Asset Management in London. “Your oil exporters will be fine, but those that are big energy importers need to worry.”

To contact the reporters on this story: Garth Theunissen in Londongtheunissen@bloomberg.net; Liz Capo McCormick in New York atemccormick7@bloomberg.net.

The Federal Reserve Treasury holdings 37% greater than China

There are two key datapoints to present in this week's Fed balance sheet update: the surge in excess reserves, and the comparative Treasury holdings between the Fed and other foreign countries. But first the basics: the total Fed balance sheet hit a new all time record of $2.5 trillion. The increase was primarily driven by a $23 billion increase in Treasury holdings as of the week ended February 23 (so add another $5 billion for yesterday's POMO) to $1.214 trillion. With rates surging, QE Lite has been put on hibernation and there were no mortgage buybacks by the Fed in the past week: total MBS were $958 billion and Agency debt was also unchanged at $144 billion. The higher rates go, the less the QE Lite mandate of monetization meaning that the Fed will be continuously behind schedule in its combined QE2 expectation to buy up to $900 billion by the end of June. Yet most notably, as we touched upon yesterday, the Fed's reserves with banks surged by $73 billion in the past week, as more capital was reallocated from the unwinding SFP program. As noted previously, we expect the total bank reserves held with the Fed to jump from the current record $1.29 trillion to at least $1.7 trillion by June.

Full Fed Balance Sheet:

Tracking purchases of USTs coupled with dispositions of Agency debt, shows that while the first is accelerating, the second is slowing down dramatically:

Most notably is the dramatic and sudden surge in excess reserves:

And the old faithful chart comparing Fed holdings with those of formerly major foreign holders. The Fed now surpasses China in its Treasury holdings by 37%!

The U.S. shuts out the S&P from rating it's debt.

A week after S&P announced it was converting its European ratings to unsolicited as was reported previously, the rating agency now proceeds to do the same to the world's most insolvent banana republic: "Standard & Poor's Ratings Services today said it converted its issuer and issue credit ratings on the U.S.  federal government (AAA/Stable/A-1+) to "unsolicited." Unsolicited as in nobody wants it. In other words, following Europe, the US will now lock out S&P in providing the agency with information. "We are converting our issuer credit ratings on the U.S. government to "unsolicited," as we do not have a rating agreement with the sovereign. Standard & Poor's will nonetheless continue to rate the U.S. government and classify the ratings as unsolicited, as we believe that we have access to sufficient public information of reliable quality to support our analysis and ongoing surveillance, and because we believe there is significant market interest in the U.S. government rating." It is a good thing then that by now everyone knows just how relevant S&P's ongoing AAA/Stable rating on the US is.

From S&P

    * Standard & Poor's is converting its issuer and issue ratings on the U.S. government to "unsolicited."
    * On May 24, 2011, we will withdraw all of our issue ratings on the U.S. government.
    * The U.S. government unsolicited issuer credit rating will remain outstanding.
    * This conversion follows previously announced conversions of Standard & Poor's issuer and issue credit ratings on seven sovereign issuers in Europe.
    * New EU regulations require non-EU ratings, where relevant, to be labeled as unsolicited, in order for them to be considered endorsable into the EU for regulatory purposes.

NEW YORK (Standard & Poor's) Feb. 24, 2011--Standard & Poor's Ratings Services today said it converted its issuer and issue credit ratings on the U.S.  federal government (AAA/Stable/A-1+) to "unsolicited."

This conversion follows previously announced conversions of the ratings on seven sovereigns in Europe. These actions, in turn, follow new EU regulations on credit ratings (Article 10(5) of EU Regulation 1060/2009), which address matters relating to the disclosure and presentation of credit ratings, requiring, among other things, that unsolicited credit ratings be identified as such.

We are converting our issuer credit ratings on the U.S. government to "unsolicited," as we do not have a rating agreement with the sovereign. Standard & Poor's will nonetheless continue to rate the U.S. government and classify the ratings as unsolicited, as we believe that we have access to sufficient public information of reliable quality to support our analysis and ongoing surveillance, and because we believe there is significant market interest in the U.S. government rating.

Standard & Poor's has also converted its U.S. government issue ratings to "unsolicited" and intends to withdraw these ratings on May 24, 2011.

This decision does not change Standard & Poor's view of the creditworthiness of the U.S. government. Our AAA/Stable/A-1+ ratings on the U.S. government remain unchanged.

Standard & Poor's unsolicited sovereign ratings may be based solely on publicly available information and may involve the participation of government officials. Standard & Poor's has used information from sources believed to be reliable based on standards established in our Credit Ratings Information and Data Policy, but does not guarantee the accuracy, adequacy, or completeness of any information used.

Laszlo Birinyi's Teflon 20...those that are immune to the market!!! SHORT THEM!!! Birinyi the idiot says not to...

Food Inflation Quickens, Adding Pressure on Government Before India Budget - Bloomberg

Food Inflation Quickens, Adding Pressure on Government Before India Budget - Bloomberg

Buffett Says Pricing Power Beats Good Management - Bloomberg

Buffett Says Pricing Power Beats Good Management - Bloomberg: "“The single most important decision in evaluating a business is pricing power,” Buffett told the Financial Crisis Inquiry Commission in an interview released by the panel last week. “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”"

Bloomberg article on Food inflation and Global implication. Food riots/Poverty

Food Riots Threaten Latin America on Surging Commodities

By Nicholas Larkin - Feb 16, 2011 3:26 AM ET

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Robert Zoellick, World Bank president. Photographer: Tomohiro Ohsumi/Bloomberg

Countries in Latin America and Africa, including Bolivia and Mozambique, are most at risk of food riots as prices advance, the United Nations reported.

The past month’s protests in North Africa and the Middle East were partly linked to agriculture costs. World food prices climbed to a record in January, the UN said on Feb. 3. Food prices are rising to “dangerous levels and threaten tens of millions of poor people” globally, World Bank President Robert Zoellick said yesterday.

“The low-income food deficit countries are on the front line of the current surge in world prices,” Abdolreza Abbassian, a senior economist at the UN Food and Agriculture Organization in Rome, said in an e-mail Feb. 14. Other countries where expensive food imports may become a “major burden” include Uganda, Mali, Niger and Somalia in Africa, Kyrgyzstan and Tajikistan in Asia and Honduras, Guatemala, and Haiti in Latin America, he said.

Wheat traded at a record in Zhengzhou, China on Feb. 14 and the grain, corn and soybeans rallied to the highest levels in 2 1/2 years in Chicago the past week. Governments from Beijing to Belgrade are raising imports, limiting exports or releasing supply from stockpiles to curb inflation.

Higher prices of wheat, rice, sugar and dairy products helped push the FAO’s Food Price Index to a record last month. Protests in North Africa have driven Tunisia’s President Zine El Abidine Ben Ali into exile after 23 years in power and forced Hosni Mubarak to resign as Egypt’s president and hand power to the army.

Food Crisis

North Africa is “still vulnerable, even more so than before as situations are uncertain and domestic price stability depends on the good functioning and continuation of subsidy programs, such as in Egypt,” Abbassian said in response to the question on which countries are most at risk of food riots.

The world faces a “real risk” of a food crisis as agriculture-commodity prices climb, increasing the likelihood of riots in developing countries, French Agricultural Minister Bruno Le Maire said earlier this month. Rising prices have pushed 44 million more people into “extreme” poverty in developing countries since June, the World Bank estimates.

Goldman View

Food prices are going higher because there is competition for limited arable land to boost supplies, said Jeff Currie, global head of commodities research at Goldman Sachs Group Inc. in London.

“Each time there were food price spikes in the last decade, there would be rotation from one crop to the next, meaning you would go from a bull market in one crop to the next crop each year,” Currie said in an interview yesterday. “What is different this time is that there is less capability to rotate land because strong demand is exhausting total arable land.”

Higher food costs helped provoke deadly riots this year in countries including Algeria, and at least 13 people died in Mozambique last year in protests against plans to increase bread prices. The U.S. State Department estimates there were more than 60 food riots worldwide from 2007 to 2009.

Global wheat harvests may trail demand for a second year, spurring “widespread” hoarding and further price gains, Abbassian said last week. Wheat production needs to increase at least 3 percent to 4 percent, he said then.

Wheat Production

Global wheat production will probably drop 4.3 percent to 653 million metric tons in 2010-2011 from the previous year, while demand may expand 1.2 percent to 667 million tons, the FAO said in December. The U.S. Department of Agriculture estimates output at 645.4 million tons and demand at 665.2 million tons.

“The world needs wheat production in the 690 level next year or things shall truly become tight,” Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter, said on Feb. 14. “Stronger economies take greater sums of grain to meet rising demand or prices shall have to rise to ration supplies.”

About 42 percent of the total area planted with wheat in China’s eight major producing provinces has been hurt by a dry spell that may last into the spring, Minister of Agriculture Han Changfu said Feb. 9. China is the largest wheat consumer, representing about 17 percent of global use in the year to June 30, according to data from the London-based International Grains Council.

Russia’s Drought

Prices gained after drought slashed Russian production, floods eroded crops in Australia and Canada and dry weather threatened U.S. output.

Wheat reached $9.1675 a bushel on the Chicago Board of Trade on Feb. 14, the highest price since August 2008 for a most-active contract, and has surged 76 percent the past year. That compares with an 88 percent gain for corn and a 47 percent increase for soybeans.

The crisis is global. Bolivia will tap central bank reserves to spur agricultural production and stockpile food, Finance Minister Luis Arce said on Feb. 10. Protests over sugar shortages and rising transport costs prompted President Evo Morales to cancel his participation at an event in the mining city of Oruro last week. Faster inflation caused by rising food prices is becoming a global problem, Arce said.

Still, higher food prices will prompt increased investment in agriculture research, development and infrastructure, Cargill Inc. Senior Vice President Paul Conway said yesterday at a conference in Birmingham, England. Improved technology and investments to attract young people into agriculture will enhance yields and help the world’s farmers feed a population that’s expected by the U.K. government to rise to 8 billion by 2030, he said.