[ForexNews]

Three takeaways from the meetings:

1) The IMF's principle 1: "The timing of exit from stimulus should depend on the state of the economy and the financial system, and should err on the side of further supporting demand and financial repair. ... Policy stimulus and other critical support measures should be withdrawn only when there is firm evidence of durable financial stability and a self-sustaining recovery in private demand. Current conditions do not justify a significant and abrupt withdrawal of either stimulus or efforts to mend the financial system ... The recent rebound in GDP growth seen in some economies is largely accounted for by policy support and a turn in the inventory cycle. ... One of the key lessons from experiences of similar crises is that withdrawing policy stimulus too early can be very costly... " Compared with the IMF's usual orthodoxy on macro policies and its tendency not to stray too far from the views of the major countries, this puts a strong seal of approval on ease for an extended period.

2) Risk of further USD weakness:- "In real effective terms, it [the USD] has moved closer to medium-run equilibrium (though it still remains on the strong side). The euro ...remains on the strong side of its equilibrium... there are indications that the U.S. dollar is now serving as the funding currency for carry trades." The USD is undeniably weak. However, the gap between G3 rates is relatively modest.. The differential between 2y notes yields in the euro zone and those in the "high yielders" (Australia and New Zealand in G10; Brazil, India and Indonesia in EM) is far wider than the gap between the euro zone rate and the US. While low yielders tend to be weak currencies, we are skeptical that full scale carry trades (a la JPY in 2002) are as pervasive as the IMF suggests.

3) No consensus on Tobin tax: The IMF comments, "IMF Director Dominique Strauss-Kahn told reporters 'The financial industry has made such big innovations that it is probably impossible to find a transaction tax that will not be avoidable by potential taxpayers. So it will be based not on transactions but on something else.' He made it clear that there was no consideration of a currency transactions tax... 'Think of it as a two-fold objective: (i) incentive for markets to take less risk; (ii) provide resources to an insurance fund if risk materializes.'" Other reports suggested that ECB President Trichet was skeptical and US Treasury Secretary Geithner was opposed. In the public finance literature, transactions taxes tend to be viewed as very inefficient compared with value-added or income taxes.

Dec 2010 fed fund futures at contract lows
Even before Friday's labor market data, Dec 2010 expected fed fund yields were at contract lows (and their yields went even lower after the payrolls release). This is suggestive that markets continue to expect a very easy Fed monetary policy, despite the surprising strength in the recovery and asset markets. As in the IMF comment above, there seems to be more concern on the quality of the recovery than in its quantity. The US and other G3 countries are providing liquidity that largely seems to be benefiting non-G3 asset markets.