Thursday, October 18, 2007


As central banks around the world struggle to control local currency appreciation against the US dollar, USD negative developments in recent days, is going to make their task all the more difficult.

1) The first net outflow for 9 yrs, in the month of August.
US Treasury data showed a net long-term capital outflow of US$69.3bn for August while there was a total outflow of US$163bn.
Central Banks selling US Treasury Bonds is extremely USD negative
Possible currency diversification away from the USD?

2) The Master-Liquidity Enhancement Conduit (M-LEC),
Citigroup, JP Morgan Chase and Bank of America will lead a consortium of banks to create a master conduit to revive the global commercial paper market,
where liquidity has all but dried up.

They plan to raise over $80Bn ( surely not enough), and purchase assets ( bank bonds/asset backed mortgages/ subprime debt/only highly rated paper ) from Structured Investment Vehicles ( SIVs), thereby enabling SIVs to avoid dumping their $320 billion in holdings and causing further turmoil in the already troubled credit markets.

Firstly who will they raise this money from? At a time when liquidity is so tight, and no one wants to have anything to do with US mortgage related debt.
Or is the M-LEC safe because it is backed by some of the Worlds largest investment banks, who themselves are at the centre of this SIV and derivative market maze?

The conflict of interest !!!!
Citi itself has a large exposure to the SIV market !
Will the lead bankers earn fees and commissions for managing the conduit.

3) The National Association of Home Builders' housing index falls to a record low of 18 in October from 20
The NAHB for sales of new, single-family homes decreased to 18 this month from 20 in September. Clearly no recovery in sight for the US homebuilders, not for a long while yet.

As emerging markets struggle with foreign fund inflows that are boosting their currencies and stock markets, the negative flow of US Treasury investment by central banks will add to the trade deficit problems of the US Economy.

So is a weak US dollar good or bad for the US Economy?

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