[achiever]

The ECB was clearly hawkish relative to the market's anticipation: cut was less than expected and no unconventional measures included, so Euro positive, since anticipation of a move to QE had put pressure on EUR all week. Will ECB "slows" derail the risk rally? Not likely. China, acting in its self-interest has produced a positive jump in its Purchasing Managers Index. These series are useful lead indicators in the US and Western Europe. With the caveat that all Chinese data releases have a "policy" element to them, the jump from 49.0 to 52.4 is a ray of sunshine. Industrial metals (copper) and lumber have all put in bottoms. Clearly the wall of liquidity provided by Central Banks, the fiscal stimulus aimed at infrastructure and the easing of "market panic" stack the odds for a strengthening, albeit from a very weak starting point. The market is seeing an improvement in the global risk-taking appetite now that we are past the Japanese fiscal year-end. The usual favorites of Japanese investors…..AUD, GBP, NZD, CAD are all firmer. London is playing the "growth stabilization" via Emerging Markets funded in USD, JPY and CHF. USDJPY appears headed for 110 and no protest from the American team. EURJPY to 148 then. The EURO rally will continue until any of the following speak up: Ireland, Spain, Greece, Italy. The ECB can contain a EURO rally just by releasing local economic news. Gold now below $900 suggests that the market has read the set of Angela Merkel's jaw.

Today it looks like it will all be slower, with less leverage. What stick can they use with the German Chancellor once everyone is back home tomorrow? The EURGBP cross rate comes to mind.

[RealInose]

Yesterday the G20 agreed to support a new Special Drawing Right (SDR) allocation of US$250bn. For many, however, it is unclear what SDRs are, how they supposed to work and what implications they have for the global financial system.

SDRs are often described as the IMF’s ‘reserve asset’ and are issued to all its members based on their IMF contributions, or quota. They are designed to act as an insurance scheme by which countries in need of liquidity can access hard currencies from surplus countries at a subsidised interest rate.

The way SDRs would work is that members may agree bilaterally or via the IMF to exchange their SDRs for currency. So a country needing funding would ‘purchase’ hard currency by drawing down its SDR and would be liable to pay interest to the Fund (at a lower-than-market SDR rate). The country accepting the SDR would in turn receive interest from the Fund for holding SDRs over and above its allocation.

Countries may only buy currency up to the value of their SDRs, and cannot apply for more. In order to complete a transaction, the Fund may be asked to designate a counterparty. In this situation only countries with a strong balance of payments position can be compelled to sell currency. And if the SDR holdings of a ‘surplus’ country reach three times its allocation, it cannot be forced to sell more.

In practice, this means that credit constrained EM economies should benefit from accessing these funds by avoiding a risk premium, while SDR basket countries/centres (such as the Eurozone, the US, the UK and Japan) and surplus countries (mostly EM Asia and oil exporters) would provide the funding. For surplus countries, this accounts for a change in the composition of their fx reserves (e.g. more SDRs, less USTs), and given that rates of return should not differ significantly, the economic impact should be minimal.

The proposed allocation of US$250bn would mean that China’s share would be US$9.4bn and it could be designated to provide at most US$28bn, a small amount relative to its US$2tn in fx reserves. Similarly, a country like Turkey would receive just US$1.3bn, a small amount compared to its last US$10.3bn Stand-by Arrangement. Singapore’s allocation (close to US$1bn) would also be small relative to the US$30bn swap line already arranged with the Fed.

So the SDR allocation should not have a material impact on the financial system globally. But it should help alleviate financial constraints of some EM economies by reallocating savings from surplus to deficit countries in a less onerous way than markets would.