IMF review on China speaks favorably on the economy

The newswires are reporting that the IMF has prepared a China Review where they have said the economy is turning around but there is room for additional fiscal stimulus as unemployment is thought to continue to rise in the near term.  Furthermore, they advise the  unwinding of monetary easing when the recovery is in place.

This news should help the AUDUSD as it stands to benefit from increased economic activity out of China.  However, the reaction has been fairly muted so far.  The market did break to new move highs at the 0.8212 earlier in the day but quickly reversed. The highs for 2009 remain at 0.8262 and below that 0.8236. These are the next hurdles for the bullish trend that has seen the pair retrace more than half of the move down from the July 2008 high.  The next long term target for the AUDUSD comes in at the 0.8380 level which corresponds to the 61.8% retracement of the move down from July 2008 high to the October 2008 low (see chart below).

IMF’s Lipsky on the Wires

IMF’s Lipsky: Confidence seems to be recovering, IMF likely to revise projections slightly upwards, particularly for 2010

IMF’s Lipsky on the Wires

IMF Lipsky: IMF to modestly raise 2010 growth forecast for global economy

IMF’s Lipsky Comments

IMF’s Lipsky: Sees persisting downside risks as “real and significant”, warns against “complacency” on crisis

IMFs Lipsky on the newswires

•  DOLLAR TO STAY RESERVE CURRENCY AS FAR AS WE CAN SEE
• FED HAS BEEN INNOVATIVE’ IN COMBATING CRISIS
• EXIT STRATEGY WOULD BE MOST USEFUL IF INNOVATIVE TOO
• REITERATES CLEANSING BALANCE SHEETS IMPORTANT FOR BANKS
• RETURN TO GROWTH TO BE MORE SLUGGISH THAN PAST SLUMPS
• U.S. GROWTH TO DEPEND ON DEMAND ELSEWHERE
• PROGRESS NEEDS TO BE UNDERPINNED BY STRONG POLICIES
• DURABLE SHIFT IN SOURCES OF GLOBAL GROWTH NEEDED
• RISE IN U.S. HOUSEHOLD SAVINGS LIKELY TO CONTINUE
• IMF WILL WORK WITH U.S. TO IDENTIFY RISKS
• IMF WELCOMES IDEA OF SYSTEMIC RISK REGULATOR
• U.S. POLICY RESPONSE TO CRISIS NOW PAYING OFF
• U.S. POLICY RESPONSE STRONG AND COMPREHENSIVE
•  IMF SEES GOOD SIGNS AND SIZEABLE CHALLENGES IN U.S.

Over the weekend, the G20 gave the IMF the task of exploring the options for a global exit strategy

G20 Communique opens up the exploration of an exit strategy but dances around other topics. IMF increases in importance.

Although the G20 communique stated that employment is likely to continue to suffer, the idea of an “exit strategy” was discussed. Specifically, they asked the IMF “to undertake the necessary analytical work to assist us with this process.” 

The mention of the IMF seems a deliberate measure to put more emphasis on the IMF as a global bank in a global economy and divert the emphasis on the individual countries.  Whether this is “passing the buck” onto a 3rd party, or simply the realization that exit strategies are more likely to be beneficial to “all” in this global economy, if they are coordinated by a global central bank like the IMF.

In either case, it does seem to me, that the IMF is certainly becoming more and more of a force in this new global economy.

Another example of this was the comment later in the communique, that the G20 was ”exploring ways to substantially increase the IMF capacity for concessional lending through the sale of gold or other means, consistent with the new income model, and we encourage the Fund to explore the scope for increased concessionality to low-income countries.”

Last week it was reported that Russia was selling 10 billion of US debt to purchase IMF debt instruments (the debt instruments are generally thought to be a blended rate of country’s debt from the US, Japan, UK, Eurozone).   This action scared the forex market (dollar selling) as funds are diverted away from US debt obligations and spread out amongst all countries (including the US).  It also helped contribute to the back up in rates.

The use of the words “other means” in the communique, seems to be an intentional way to keep “diversification out of US debt”, out of the official communique for fear of its implications for the US dollar and the US debt market. 

In the same sentence, I found it curious that they were not shy in specifically mentioning the “sale of gold”.  The IMF holds gold on behalf of developed countries, and there has been talk in the past that they would sell these reserves for the purpose of aiding least developed countries.    By mentioning gold specifically, perhaps they are trying to keep speculators from buying gold and in the process diverting some of the fear of inflation that the market now has.  

The central bankers of the world cannot control the longer end of their respective  yield curves  - the market does that - but central bankers and finance officials, seem to be in agreement that the economies remains on a knifes edge - higher rates don’t help. 

With higher global yields (see chart above) , the threat is for the cutting off of gains made in stabilizing the fragile real estate market - especially in the US.   Supply is still too high.  Unemployment is likely to continue to rise (according to the communique) and with it comes the potential for even more foreclosures, lower home prices and more write offs on bank balance sheets.  A stable market with stable rates would allow for supply to continue to be absorbed and allow banks to replenish reserves via higher carry profits (and hopefully slowing  foreclosures). 

Commercial Real Estate is murmured as the next shoe to fall but you can bet, no one wants that to happen.  So businesses have to stay in business and pay rent/mortgages.  They have already let go of all the workers for now, and in the process  lowered their costs and hopefully profits.  Rents may still be high. Property may have lost value but as long as earnings are back on the right track, the higher costs may be absorbable.  Some businesses - still on the brink of going out of business - may be looking to move locations to lower costs, but it is not cheap to move and the next decision is likely to be to sink or swim - especially small businesses who have little choice.    

So it boils down to the consumer again and how they feel.  They will feel better if home prices remain steady and foreclosures go away.  They will feel better if jobs can be preserved not lost.  They will feel better is gas does not go up and they will fell better if the talk of inflation and higher rates stop (and perhaps that the dollar will get killed). 

In the past, the Goldilocks economy was for win - wins everywhere.  The Goldilocks of today seems more like just stay steady.  Make the necessary adjustments but don’t rock the boat too much.  We will see.

IMF’s Lipsky on the Wires

IMF’s Lipsky: Russian Ruble exchange not a problem in the short-term; Worst of economic crisis is behind for Russia

IMF’s Lipsky Comments

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