MEXICO CITY (MNI) – Further macroeconomic stimulus by advanced
economies is probably not what is required by the global economy, Bank
of Korea Gov. Kim Choong-soo said Friday.

Kim, speaking at the IIF conference taking place prior to the
meeting here of G-20 finance ministers and central bank governors,
called it a “challenging question” what would be needed to restore
sustainable growth at a global level.

“I am suspicious that more macroeconomic stimulus by advanced
economies can be a solution to reviving growth going forward,” he said,
noting that “in the midst of high uncertainty” that exist now, the
investment- and consumption-boosting effects would “still fall short.”

In contrast, emerging market economies where inflation is under
control “should not hesitate to use the policy space available to them
to address the downside risks to growth,” he urged.

Kim warned of a “substantial tail risk associated with the European
sovereign debt crisis, which, if it materializes could wreak havoc” on
emerging markets.

“I am hopeful” that the agreement recently reached with respect to
Greece “will contribute to a sharp reduction in the uncertainties now
facing emerging markets,” he said.

However, emerging markets still will “face challenges going forward
if advanced economies do not grow fast enough,” he said, while “advanced
countries also face challenges” such as “high and rising public debt”
and “high long-term unemployment.”

As well, “the euro area has and will remain vulnerable to growing
structural imbalances between core members and its periphery,” he added.

“Global financial resources may have in recent years been directed
too much to the financing of unsustainable fiscal deficits in
debt-ridden countries and too little toward growth.”

A redirection of these resources towards promoting growth “could
bring substantial productivity benefits to all in the long run,” he
said.

Kim noted the IMF forecast of slow economic growth this year,
“particularly in Europe.”

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

[TOPICS: MGX$$$,MT$$$$,M$$EC,M$X$$$,M$$CR$,MI$$$$,M$M$$$]

Italian market regulator Consob stated that Italy will  not extend its ban on short selling of financial shares after it expires today.  

After European banks hit their lowest levels since the credit crisis of 2008, France, Belgium, Spain and Italy moved to prohibit short selling of financial shares in August in order to stabilize markets.     France,Belgium and Spain ended their bans last week.

• Large moves continue in EUR, GBP and JPY
• Greece launches PSI deal, needs more than 75% participation
• ECB’s Weidmann: no discussion of another LTRO
• ECB’s Nowotny sees no need for more LTROs
• COT: EUR speculative shorts scaled back
• Germany softens on firewall
• Plosser says MBS buys crosses line
• Dudley says govt needs a fiscal plan
  Fed’s Williams not against further easing
• Bullard: Prefers Treasurys to MBS but only if inflation falls
• IIF’s Dallara expects high take up in PSI
• US new homes sales 321K vs 315K exp
• Final UMich consumer confidence 75.3 vs 73.0 exp
• BOCs Carney: Rates appropriate
• IAEA says Iran continues nuclear work
• Brent hits $125.55, WTI nearly $110
• IMF’s Lipton says high oil prices a downside risk
• S&P 500 +0.2% to 1366, highest since June 2008

Where to start? EUR shorts and JPY longs were squeezed badly. EUR/USD continued to bust through stops, tracking from 1.34 to 1.3487 in US trading.

USD/JPY touched 81.11 at the end of the session, marking a weekly close above the weekly ichimoku cloud. Offers at 80.65 held off the assault until the European close but afterwards it was all to the upside.

EUR/JPY hit 109 after starting the day at 107 and it was almost a straight-line move.

Large position unwinds in EUR/AUD spilled over to AUD/USD and held the pair under 1.07. Flows were a major theme as yen and euro crosses triggered moves elsewhere.

Gold was quiet but oil gained for the seventh day, falling just short $110 in another one way move.

The U.S. Commodity Future Trading Commission will hold a discussion next week to consider a plan to safeguard collateral following the collapse of MF Global Holdings Ltd.

According to various sources, the plan is designed to protect clients' collateral if their broker defaults, while also allowing the customer funds to be pooled before a bankruptcy.    The plan would be similar to new rules for the swaps market that were completed on January 11^th, 2011.     

Thanks to everyone who participated in our survey.  You provided some great feedback.  We contacted our 10 tee shirt winners  this week.  5 of you have sent information back.  Check your spam folders for an email from ForexLive.

That’s a big candlestick this week but we have come a long way from 1.68.

MEXICO CITY (MNI) – The Germany economy will soon start to pick up
speed again, provided there is no intensification of the sovereign debt
crisis, which up to now has had limited impact on the Eurozone’s largest
member state, European Central Bank Governing Council member Jens
Weidmann said Friday.

Speaking at the IIF conference taking place prior to the meeting
here of G-20 finance ministers and central bank governors, Weidmann, who
heads the Bundesbank, said that Germany was doing a lot to help its
partners and Greece must fulfill its commitments if there is to be
further assistance.

It is wrong to criticize Germany for not making use of supposed
room for fiscal maneuver, and wrong to think the crisis can be solved by
dint of money alone, he said.

“Although the German economy has lost momentum over the past few
months, we expect GDP growth to pick up soon,” he said. “This
expectation is, of course, predicated on the assumption that the
sovereign debt crisis will be overcome step by step and will not further
intensify.”

As to Greece, “some progress has been made during recent weeks,” he
allowed. “Let me say that I fundamentally welcome the fact that the
euro-area finance ministers came to an agreement on Monday regarding a
second financial assistance programme for Greece.”

He continued with a warning: “In order to achieve a turnaround and
allow further assistance, it is now essential for Greece to deliver on
the promises that have been made. Ultimately, Greece cannot be forced to
comply with the programme. But it should be clear that no further
disbursements will be warranted if Greece fails to keep its side of the
bargain.”

Weidmann criticized the “popular misconception” according to which
“Germany, while itself managing to dodge the flames of the current
crisis, is now selfishly refusing to come to the aid of the stricken
countries by acting as chief firefighter.”

Actually, “Germany is doing a great deal to help its partners,” he
argued, noting the country’s large financial share in containment
measures and its support for reforms and discipline.

“Germany is not trying to force its own economic philosophy on
others, but rather is living up to its responsibility to ensure a stable
and sustainable monetary union,” he affirmed.

Urging EMU member states to bolster confidence via fiscal
consolidation, which he called “unavoidable” and “less contractionary
than is often assumed,” Weidmann rejected as “inappropriate” complaints
that Germany is not using its own supposed fiscal leeway.

The benefits deriving to the European periphery from more
expansionary fiscal policy in Germany would not approach the risks of
deviating from the path of fiscal virtue, he argued.

Although it is “crucial” to establish ring-fencing measures to
counter any possible worsening of the crisis, demands that the
Eurosystem play a stronger role here overlook the great contribution of
the Eurosystem through its unconventional measures, he said.

“This has already stretched central banks’ mandate significantly,
and going even further would undermine the credibility of monetary
policy,” he cautioned.

“This leads to a more general point,” he added. “The crisis cannot
be resolved solely by throwing money at it. While money can buy us time
to tackle the crisis, it is imperative that we use that time in order to
address its root causes.”

Bilateral credit lines extended by EMU member states to the IMF to
help address the crisis “must have all the characteristics of a reserve
instrument,” Weidmann said. “In particular, the IMF must not become a
vehicle for monetary financing of government deficits.”

Even if the crisis has been one of advanced economies, the low
interest rates implemented in these countries in response can lead to
larger capital flows to emerging markets, he said. At the same time,
banks in trouble can limit cross-border investment, while an economic
slump in industrialized nations can hurt exports of EMEs, he observed.

Still, he said, if agreed measures are rigorously put into place,
“I am confident that, by following this course, we will eventually
contain the crisis and that the euro will remain a stable currency.”

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

[TOPICS: MGX$$$,MT$$$$,M$$EC,M$X$$$,M$$CR$,M$G$$$]

• To -142K from -149K
• JPY to +17K from +29.5K
• AUD to +75K from +74K
• GBP to -31K from -41K
• CAD +14K from +9K
• NZD +24K from +24K
• CHF -20K vs -16K

Tough to be bearish on the euro when so much smart money is trapped in shorts that are losing money every day. Lots of volume still in those EUR/AUD shorts. As always, the data is ‘as of the close on Thurs’.

Via RTRS.

They don’t need no more stinkin’ QE

Euro shorts will be cut once again but it will be most interesting to see how quickly specs are piling into JPY shorts. Big drop last week but it could be an even bigger one today.

By Steven K. Beckner

NEW YORK (MNI) – New York Federal Reserve Bank President William
Dudley Friday said the climate of very low interest rates likely
increases the size of fiscal “multipliers” and thus requires care in the
size of fiscal stimulus the federal government provides.

Dudley also said that, despite losses to those who receive interest
payments, the Fed’s policy of lowering rates is a net plus for the
economy.

Philadelphia Fed President Charles Plosser, appearing with Dudley
on a panel at a University of Chicago Booth School of Business monetary
policy forum, stressed the need for a “credible” plan of deficit
reduction.

Simply saying that future Congresses will reduce deficit spending
is not credible, said Plosser.

Plosser said he does not think the fiscal multiplier — the degree
to which a given amount of deficit spending will increase GDP — is very
high. Dudley differed, particularly in a climate of very low rates.

“In the current environment where we’re at the zero bound and
interest rates are very low, it’s probably fair to say that the fiscal
multipliers are higher,” said Dudley, but he added that therefore the
government has to be “somewhat cautious about how much fiscal (stimulus)
is put into the economy.”

In earlier prepared remarks, Plosser said the Fed had veered into
fiscal policy by purchasing mortgage-backed securities and other
programs, and he argued for a “new accord” between the Fed and Treasury
to draw “a bright line” between monetary and fiscal policy.

But Dudley disputed Plosser’s concerns.

“I would argue that to date the Federal Reserve has not engaged in
anything that constitutes fiscal action,” he said. “Our interventions
brought financial stability, which is very much the province of the
central bank.”

Dudley also observed that the Fed has “not lost a penny” on its
various credit facilities designed to help financial institutions that
suffered insolvency during the financial crisis.

“Despite a very bad macroeconomic environment our actions did not
step over line into the fiscal arena,” he said, adding that “certainly
from a financial stability perspective … it is very much in the
province of the central bank.”

The Fed “can’t fulfill its mandate of maximum employment and price
stability” without price stability, Dudley said.

** Market News International New York Newsroom: 212-669-6430 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]

A bit early to be giving out grades, especially with yields at 12.7% in his own backyard.

Looks like a sad year for Hollywood. Tree of Life is unwatchable, Moneyball was lame and a silent movie has it all wrapped up. I haven’t seen Hugo, but I might check it out on the weekend.

The ForexLive nominees for best financial movie of the year:

• Margin Call
• Too Big to Fail
• Limitless
• The Company Men

Cast your votes

Looks like the IMF won, as Germany appears to be backing down on the larger firewall debate.

This will need to get through all the Parliaments so it will not be a picnic.

By Steven K. Beckner

NEW YORK (MNI) – Philadelphia Federal Reserve Bank President
Charles Plosser Friday strenuously objected to what he considers the
“breakdown” of traditional boundaries between monetary and fiscal policy
and what he called the “perversion” of central banks “lender of last
resort” role.

Without naming the European Central Bank, Plosser seemed to have
the ECB in mind when he said lending to governments is a “fig leaf” for
debt “monetization.” And he warned that efforts by the ECB and others to
prevent Greek debt default is not preventing the spread of the European
debt crisis.

Plosser, in remarks prepared for delivery to a Monetary Policy
Forum sponsored by the University of Chicago Booth School of Business,
also had harsh words for his own central bank, accusing the Fed of
engaging in fiscal policy with its purchases of mortgage backed
securities and other activities.

He said the “breakdown” of monetary/fiscal barriers is “dangerous
and fraught with long-term risks” and called for a “new accord” between
the Fed and Treasury to reestablish those limits.

Plosser, who is not a voting member of the Fed’s policymaking
Federal Open Market Committee this year but serves on an FOMC
subcommittee on communications, also deplored large-scale deficit
spending in the United States. He said uncertainties about fiscal policy
are creating uncertainty and impeding hiring and investment, thereby
limiting the pace of recovery.

It is the task of a nation’s central bank to maintain the
purchasing power of its currency, but Plosser said “that task can be
undermined or completely subverted if fiscal authorities independently
set their budgets in a manner that ultimately requires the central bank
to finance government expenditures with significant amounts of
seigniorage in lieu of tax revenues or debt.”

He went on to suggest that the central bank’s role in guaranteeing
price stability and protecting the value of the currency is, in fact,
being subverted.

“Unfortunately, over the past few years, the combination of a
financial crisis and sustained fiscal imbalances has led to a
substantial breakdown in the institutional framework and the accepted
barriers between monetary and fiscal policy,” he said.

“The pressure has come from both sides,” he continued. “Governments
are pushing central banks to exceed their monetary boundaries and
central banks are stepping into areas not previously viewed as
acceptable for an independent central bank.”

He proceeded to cite some examples, beginning with “a not-so-subtle
undermining of the commitment to price stability.”

“Despite the well-known benefits of maintaining stable prices,
there are calls in both Europe and the U.S. to abandon this commitment
and create higher inflation to devalue outstanding nominal government
and private debt,” he said.

Plosser warned that “such an inflation tax would transfer wealth
from those who have lent money, in good faith, to the borrowers.”

“I am deeply skeptical of such a strategy,” he said. “Inflation is
a blunt and inappropriate instrument for assigning winners and losers
from profligate fiscal policy or excessive borrowing by private
individuals and firms. Forced redistributions of this kind, if
undertaken at all, should be done through the political process and by
the fiscal authorities, not through the backdoor by the central bank by
way of inflationist policies.”

“As a monetary policymaker, I do not want to be complicit in such a
strategy,” he added, warning that “once inflation is unleashed, it is
not always easy to bring it back down, especially if the central bank
loses the public’s confidence and damages the credibility of its
commitment to price stability.”

Plosser declared that “proposals to use inflation to fix the debt
overhang problem are nothing more than a call for debt monetization to
solve a problem that is fundamentally fiscal in nature.”

Central banks are also coming under government pressure in other
areas, he said. For instance, “in some circles, it has become
fashionable to invoke ‘lender of last resort’ arguments as a reason for
central banks to engage in fiscal actions.”

It is appropriate for a central bank to provide liquidity to
financial institutions that are solvent but facing temporary liquidity
problems, he said, but “recently, some have used the concept to argue
that the central bank should be the lender of last resort to
governments.”

“This is a perversion of one of central banking’s core concepts,”
said Plosser. “It is a fig leaf to conceal the process of monetizing the
sovereign debt of those countries that are insolvent due to their
inability to manage their fiscal affairs. Monetary policy should not be
used to solve a fiscal crisis.”

Plosser said central banks themselves have been guilty of
initiating a breaching of the monetary/fiscal boundaries

“The Fed and other central banks have also undertaken actions that
have blurred the distinction between monetary policy, credit policy, and
fiscal policy,” he said.

Plosser cited the special credit facilities for commercial paper
and asset-backed securities which the Fed launched during the financial
crisis, as well as its purchases of agency mortgage-backed securities
and agency debt.

“When the Fed engages in targeted credit programs that seek to
alter the allocation of credit across markets, I believe it is engaging
in fiscal policy and has breached the traditional boundaries established
between the fiscal authorities and the central bank,” he said, noting
that “some of these actions have generated pointed criticisms of the
Fed.”

Plosser said “the breakdown of the traditional institutional
arrangements as dangerous and fraught with longer-term risks.” He said
the boundaries were created for good reason, “and we ignore them at our
own peril.”

To restore a “bright line” between monetary and fiscal policy,
Plosser repeated past calls for a “new accord” between Fed and Treasury.

“Should the fiscal authority ask the central bank to engage in
lending outside of its normal operations, the fiscal authority should
exchange government securities for the nongovernment assets that would
accumulate on the central bank’s balance sheet as a result,” he said.
“This type of swap would ensure that the full authority and
responsibility for fiscal matters remained with the Treasury and
Congress and the Fed’s balance sheet remained essentially all
Treasuries.”

** Market News International New York Newsroom: 212-669-6430 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]

We need to do some quick site maintenance at 2PM Eastern, and will be down for 5 to 10 minutes.  Any posts during the down time can be picked up on Twitter: @ForexLive.

Yesterday, I saw a note from Morgan Stanley saying they see a 75% chance of QE3 in the first half of the year. Here is a great roundup on the comments today from Bullard, Williams, Dudley and Plosser.

Next week’s key US data:

• Tues – durable goods orders, Richmond Fed
• Wed – Q4 GDP (second reading), Chicago PMI, Beige book
• Thurs – PCE, claims
• Friday – ISM manufacturing

Wednesday is also LTRO day. Non-farm payrolls won’t be released until the 9th.

By Vicki Schmelzer

NEW YORK (MNI) – The United States faces “substantial fiscal
challenges” in the coming years,” said New York Fed President William
Dudley Friday in at the U.S. Monetary Policy Forum in New York.

His prepared comments came as part of a panel discussion on the
fiscal challenges facing the world, at the Forum, sponsored by the
Chicago Booth School of Business.

As part of addressing fiscal issues going forward, Dudley
highlighted the importance of “taking the increase in debt service costs
into account that will take place when economic conditions permit the
normalization of monetary policy.”

Currently, there is an unusual situation, where net interest
expense is temporarily depressed, aided by low U.S. interest rates and
the Fed’s enlarged balance sheet.

“This will not last and fiscal authorities need to factor this in
when considering what needed to be done to put the federal budget
deficit and the nation’s debt burden on a sustainable path,” Dudley
said.

Also, he argued, fiscal consolidation needs to also factor in “the
offsetting adjustments needed to keep the economy on an even keel.”

“Fiscal adjustments require offsetting changes in private-sector
spending and saving behavior, and in the trade sector,” he said.

“Prudent economic policies and international coordination can help
ensure that such adjustments take place in ways that support economic
activity (and, by extension also support government revenue,” Dudley
said.

The low interest rate environment provided by the Federal Reserve
is meant to “promote the dual mandate objectives of maximum employment
and price stability in the wake of the financial crisis,” he said.

Both U.S. government and private sector borrowers have benefited
from lower borrowing costs, he said.

These lower costs “will not be sustained over time,” Dudley said

Fiscal policy adjustments have “important implications for the
level and composition of economic activity more boradly – both here and
abroad,” he said.

“If we must undertake fiscal consolidation — and over time we
must, then we need to be cognizant that this adjustment will need to be
accompanied by other offsetting changes in the compostion of economic
activity in our and the global economy,” Dudley said.

** Market News International New York Newsroom: 212-669-6430 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]

They’re speaking on a panel, so there are no prepared comments.

• Dudley says the US needs a credible medium-term plan to cut the deficit
• Dudley, commitment to low rates has lowered long-term borrowing costs
• Plosser says there needs to be a clear line between mon pol and fiscal policy, but Fed action has blurred the line
• Plosser: MBS purchases as breach of fiscal boundaries

This is what I’ve been trying to tell ya about all day…..