Is this the only way out of EM’s rut?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Since the 1980s, emerging markets have opened up to investment from the rest of the world. The combination of China`s reforms under Deng, the collapse of the Soviet Union, and the end of dictatorships in Latin America, meant a raft of enactments of new investment-friendly legislation.

Yet in the past decade, momentum has slowed.

With strong economic growth, and concerns over foreign firms repatriating profits away from domestic economies, emerging markets` zeal for foreign direct investment (FDI) reform fell away. According to the UN, at the turn of the millennium, just 6 percent of new investment-related policies increased restrictions and regulations. This has since risen to 25 percent.

With bulging emerging market current account surpluses for much of the decade, there was little need for external funding. Even those countries that required foreign investment, such as India, were attracting plenty of portfolio flows in any case.

A combination of superior emerging market growth, and ultra-low developed market interest rates sent investors on a `hunt for yield,` which has pushed more than USD 200 billion in portfolio flows to emerging markets since 2005.

But this has now changed, and emerging markets will now need to unlock the playing field for FDI.

The first reason for this is that emerging markets now need the funding more than at any point in the past decade. Growing levels of domestic debt have caused current accounts to deteriorate, meaning large surpluses have evaporated. Some, such as Indonesia and Brazil have rising deficits.

The second reason is that foreign portfolio flows are becoming increasingly unreliable. The prospect of incrementally tighter US monetary policy has put an end to the `hunt for yield.` Some USD 16 billion have been pulled from emerging market debt funds, and USD 24 billion from equity funds since May.

This has resulted in leading to tighter financial conditions for emerging market corporations and sovereigns alike.

A host of countries, including India, Indonesia, Turkey, and Brazil have been forced to raise interest rates to try and stem capital outflows and prevent inflation. These measures are necessary but higher rates will negatively impact growth.

And the latest IIF emerging market lending survey shows financial conditions for corporations are the tightest since the euro zone crisis in mid-2012.

Emerging markets are now in a difficult position of needing more funding at the same time that less of it is available.

As an interim step, emerging markets can use foreign exchange reserves to stabilize their currencies while keeping interest rates low. But, in the face of potentially tighter U.S. monetary policy, this is a risky strategy that most are unwilling to undertake.

Even Brazil, with its USD 370 billion war chest, has preferred to primarily deal with capital outflows by raising interest rates rather than aggressively spending reserves.

In the long run, the only sustainable solution is to make renewed efforts to reform FDI. Such measures will likely prove politically contentious, but will be necessary if emerging markets want to keep stable currencies, low funding costs, and consequentially maintain their economic growth trajectories.

India has made steps to embark down this path already, with the government announcing this month it will open up FDI in a dozen sectors of its economy, but regulations remain overly complex, and it is telling that despite a huge domestic consumer base, no retailer has applied for a license since the sector opened up to FDI in 2012.

Elsewhere in Asia, FDI into Indonesia grew at the slowest pace in three years in the second quarter, and regulatory uncertainties ahead of the 2014 elections could mean this slows further still.

To prevent a major drop-off in FDI, which created 62 percent of the country`s new jobs in the second quarter, politicians will need to provide more clarity on the future investment climate. Meanwhile, to ensure sustainable and efficient growth in the future, China will need to open up further to FDI in its domestic and service economy, and not just in trade-related sectors that have spurred its economy so far.

Continental neighbors such as Korea, Hong Kong, Singapore, and Taiwan all offer examples of economies that have become developed markets while remaining open to trade. It is time for other emerging markets to follow this path. From here, it is the only way forward.

Previously, Alex was the former Chief Financial Officer of the Bill and Melinda Gates Foundation and a member of the foundation`s management committee. Friedman joined the foundation following Warren Buffett`s historic gift in late 2006 and served as CFO during a period when the foundation more than doubled in size. Friedman also managed a private investment vehicle, Asymmetry, served as a senior advisor to Lazard, the international investment firm, and on the Supervisory Board of Actis, the global emerging market private equity firm. In his current role, Alex has been regularly interviewed by international media such as Financial Times, Bloomberg, CNBC, The Economist etc and contributes byline articles to the Financial Times.

Copyright 2011 cnbc.com

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China ends Japan’s hold on Korean tourism

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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China has overtaken Japan in visitor numbers to South Korea for the first time on record in the first half of this year, ending a long-held Japanese dominance of the market, according to Nomura.

Chinese travelers accounted for more than a third of total tourists in South Korea in the first six months of the year, outpacing Japanese visitors, which made up about one quarter of the total in the same period, Nomura said in a report this week.

Young Sun Kwon, economist at Nomura, said that although China`s economic growth slowed in the first half of the year, the number of visitors to South Korea still managed to surpass the number of Japanese visitors, which declined in the duration.

“Chinese visitors increased by 46 percent year on year in the first half of 2013, up from 30 percent in the first half of 2012, while the number of Japanese visitors declined by 26 percent year on year this year, from a 30 percent increase last year,” Kwon said.

(Read more: China tourism set for boom like Japan in the `80s )

The growing number of Chinese visitors to South Korea is being supported by an increasing number of middle class families in China and a gradual appreciation of the yuan, Kwon said.

“Barring a hard landing scenario, the increasing number of middle income households in China should support Korea`s tourism business and current account balance,” he added.

(Read more: Korea goes after Chinese tourist as yen falls )

China`s gross domestic product (GDP) per capita rose almost 12 percent to USD 6,090 in 2012 from the previous year and is expected to reach USD 7,000 either this year or in 2014, according to Nomura.

Growth on that measure comes even as expansion in the world`s second largest economy slowed to 7.5 percent in the second quarter from the previous year, compared to 7.7 percent in the first quarter, marking a slowdown in nine of the last 10 quarters.

Why South Korea?

Kwon said there are a number of factors drawing Chinese tourists to South Korea, including a concerted effort by the government to attract visitors.

“Korea is close to China with one to three-hour flights. Korean culture and food are getting more attraction from the Chinese through media and the internet. The Korean government is also making lots of efforts to induce Chinese tourists. For example, there is visa waiver for visiting Jeju Island in Korea,” Kwon said.

(Read more: Gangnam brings fans – and tourism revenue – to Korea )

Meanwhile, the major reason in the decline in the number of Japanese tourists is the stronger Korean won against the Japanese yen, Kwon said.

(Read more: As yen tumbles, Japan`s gain isn`t South Korea`s pain )

The yen has weakened nearly 7 percent against the won so far this year on Japan`s aggressive economic policies to revive its economy, making it more expensive for the Japanese to travel to South Korea.

-By CNBC.com`s Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu

Copyright 2011 cnbc.com

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How you can trade this hotly-contested election

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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As Australia faces the most hotly-contested federal election in recent memory, financial markets are looking to position their trades ahead of a vote that could see the end of three years of a minority government.

The September 7 vote pits the conservative opposition party – the Liberal-National Coalition – headed by Tony Abbott, against the incumbent Labor Party led by Prime Minister Kevin Rudd. Opinion polls give a slight lead to the Coalition, in an election race centered around employment and management of Australia USD 1.5 trillion economy.

Shane Oliver, head of investment strategy at AMP Capital said historically Australian stocks tend to experience some downside ahead of the election before rising after the vote.

“I certainly wouldn`t be adding to shares at the moment,” Oliver said. “It [Australian equities] is vulnerable or facing a period of flat lining over the next month or so in the run up to the election and that would suggest foreign investors may want to avoid the Australian market over that short period,” Oliver said.

“But history also suggests we get a rebound after the elections so as we get closer to the election, it would be case for investors to buy in,” he added.

After suffering steep falls in June, in tandem with the broad selloff in commodities on the prospect of the US Federal Reserve winding back monetary stimulus and a slowdown in China, Australia stocks rebounded 5.5 percent in July to become one of the best performing stock markets in the Asia-Pacific region. The benchmark SandP ASX 200 is up about 8 percent for the year.

(Read More: Australia`s stock market is on `fire` )

Strategists say Australia stocks are due for further gains from more certain policy making, should the opposition party win.

“I think the market at the moment is priced on assumption that there will be a change of government and Coalition will win,” Ric Spooner, chief market analyst at CMC Markets told CNBC.

This week, opposition leader Abbott made his first major election promise, vowing to cut company tax rates by 1.5 percentage points if he took office. The cut will affect about 750,000 companies, and it`s a move that could support stock markets in the event of an Abbot victory, Spooner said.

(Read more: Why a Rudd Revival Spells Bad News for Aussie Stocks )

Ben Clark, portfolio manager at wealth management firm TMS Capital, said a clear election outcome as opposed to a the hung parliament that Australia has had for the last three years would be beneficial for stocks.

“The certainty of knowing what the policies are going to be either way should create some confidence in the market. I tend to think if the Liberals get in there`ll be a bit more positivity towards that than if Labor get in,” Clark said.

Stocks to watch

According to AMP`s Oliver, “the main beneficiaries from the change in government would be the mining stocks, heavy carbon emitters and small companies if the carbon tax rate gets cut under the Coalition (Liberal) government.”

The ruling Labor Party has long been criticized for implementing the unpopular tax on carbon emissions, which the opposition has blamed for pushing up electricity prices. Last month, Prime Minister Rudd moved to scrap the carbon tax and replace it with an emissions trading scheme that would save big businesses billions in costs in an attempt to win over voters.

(Read More: Australia plans to scrap carbon tax, bring forward trading scheme )

However, an Abbott win could be negative for companies dependent on government spending.

“The losers will be potentially Telstra if there is a wind back in the spending on the national broadband system and consumer discretionary stocks if there is a move to cut back government spending,” Oliver said.

In the short-term, however, the elections will not be a “massive” driver for the market, according to Clark, who says there bigger factors at play.

“Earnings season that we`re in now is a much bigger factor on the short term direction of the market than the election is,” Clark added.

-By CNBC.com`s Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu

Copyright 2011 cnbc.com

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Is this currency about to follow rupee’s crash course?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The spectacular fall in the rupee has been grabbing market attention in recent months, but the focus could soon shift to the Indonesian rupiah, which Credit Agricole warns could suffer the same fate as the embattled Indian currency.

Dariusz Kowalczyk, senior Asia ex-Japan strategist at Credit Agricole, said Indonesia’s slowing growth and rising inflation, which exceeds India’s, as well as an increasing current account deficit and low foreign exchange reserves, are starting to resemble the problems faced by India’s economy.

“(The) fundamental picture is increasingly looking similar to India’s but the rupiah has suffered much less and will need to catch up,” Kowalczyk said.

India’s rupee has fallen nearly 13 percent against the dollar year-to-date, brushing a fresh record low around 61.87 last week. It currently trades around 61.19. The Indonesian rupiah, meanwhile, is down nearly 7 percent against the dollar this year, and currently hovers at around 10,285.

Agricole now expects the rupiah to weaken to around 10,400 against the dollar by year-end, noticeably more bearish than its previous forecast of 9,890.

 The rupiah weakness, together with the accelerating inflation, will likely prompt a rate hike by the Bank of Indonesia when it meets on Thursday, said Agricole. Indonesia’s annual inflation hit 8.61 percent in July, its fastest pace in more than four years.

Kowalczyk expects the benchmark rate to rise by 25 basis points to 6.75 percent. Majority of analysts polled by Reuters expect no change in monetary policy.

Indonesia’s central bank, like the Reserve Bank of India, has been actively trying to prop up its currency. In July, it moved to sell between USD 100 million to USD 150 million a day at levels, well below deal rates, in an apparent attempt to keep the rupiah below 10,000; it eventually relaxed its stance and the rupiah weakened further.

 Capital outflows from Indonesia have continued, Kowalczyk writes, noting Indonesia’s net portfolio inflows peaked at USD 6 billion in May and have turned into an outflow of up to USD 200 million.

Kowalczyk expects that as Bank Indonesia raises rates, inflation expectations will temper and spur further outflows. He adds that moves by the US Federal Reserve to taper its asset purchases could exacerbate the trend.

Other analysts also have doubts about the rupiah, but they aren’t as bearish.

 According to Nizam Idris, head of strategy for fixed income and currencies at Macquarie, “Indonesia’s current account and fiscal deficits are small” compared to India. “The dollar-rupiah could continue to rise, but I think it will be a lot slower than the rupee.”

He also expects a quarter percentage point rate hike on Thursday, but a decision to keep rates steady wouldn’t be a surprise. “The dollar rupiah has stabilized. That may actually be against another immediate hike, but going forward there’s still the possibility of another hike.”

The rupiah hit a record low during the Asian financial crisis in 1998 when it fell to as much as 16,800 against the dollar.

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Fund managers shun this most ‘hated’ asset class

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Fund managers are more downbeat on emerging market equities than they have been in the last 12 years, as allocations to the sector sink to their lowest levels since November 2001 according to a new survey.

The Bank of America Merrill Lynch (BofAML) August poll showed that while fund managers around the world fled emerging market stocks, they piled into developed markets, with UK exposure reaching a 10-year high and US equities peaking at the third-largest overweight in the last 10 years.

Euro zone allocations also surged, reaching the highest level since January 2008, with 17 percent of global asset allocators overweight the region.

Michael Harnett, chief investment strategist and report author at BofAML argued that this en masse shun of emerging market equities has created short –term trading opportunities, while UK and US stocks now look over-owned.

“The August 2013 global fund manager survey shows that consensus is bullish on global growth, bearish on bonds and hates emerging markets. EM (emerging market) equity exposure fell to its lowest level…since November 2001,” said Harnett.

Some 75 percent of investors think the dollar will strengthen over the next 12 months, down from the record 83 percent seen last month.

“Strategically we tend to agree with these points, but in the near term a dip in the dollar or a rise in bonds prices will probably also catalyze something of a catch-up in emerging market stocks and commodities – both of which are quite dollar-sensitive,” said John Bilton, European investment strategist at BofAML.

“We think this could be creating something of a buying opportunity, at least tactically, as it is the most unloved part of the equity market,” he added.

BofA’s recommendation to snap up beaten up EM stocks is however in contrast to that of JP Morgan, which warned investors that it is still too early to pile into the sector on Monday.

On global growth, 72 percent of investors globally expect to see a stronger global economy in the next year, which is the most since 2009.

Sentiment towards the euro zone improved notably, with no fewer than 88 percent of European fund managers now anticipating the region strengthening in the year ahead, twice the level recorded last month. Respondents increasingly view stronger growth as the likeliest solution to the euro zone debt crisis, rather than interventions by the European Central Bank.

 “We have 64 percent expecting to see in a pickup in corporate earnings, but there is still 55 percent that don’t expect to see double digit earnings growth, the gap between the direction and the level is the widest we have ever seen,” said Bilton.

The survey polled a total of 229 panelists with USD 671 billion of assets under management.

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Most expensive place to study? Not for much longer

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Australia is the world’s most expensive destination for foreign students, but thanks to a weakening currency, the popular venue for education is set to become more affordable.

According to a report from HSBC, Australia currently tops the rankings of the costliest nations for higher education, with annual expenses topping USD 38,000 a year. But that could change with the Australian currency tumbling more than 12 percent against the US dollar this year.

Graham Heunis, head of retail banking and wealth management at HSBC, says the strong Aussie dollar in recent years have dealt a blow to local tertiary institutions, traditionally a popular choice among foreign students for its international recognition and relative proximity to the rest of Asia.

Foreign student enrollments in the country have fallen 12 percent between 2009 and 2012. During that time, the Australian dollar rose around 50 percent versus the greenback.

“Having withstood the cost pressure of the high Australian dollar for the past three years, Australia`s tertiary institutions could see international student numbers swing back with the falling Australian dollar,” Heunis said.

After Australia, United States and United Kingdom are the next most expensive places for foreign students pursuing tertiary degrees, with annual costs at around USD 35,000 and USD 30,000 respectively,according to the survey.

Singapore, Hong Kong, and Japan are among other Asian nations in the top 10 rankings, costing overseas students an estimated USD 24,000, USD 22,000 and USD 19,000, respectively, per year.

HSBC forecasts the Aussie dollar to fall further this year, with a target price of USD 0.86 by the fourth quarter, which is another 5 percent downside from its current level of USD 0.91.

Apart from a falling currency, HSBC expects improved visa processing methods to increase the influx of international students.

“While Australian universities may have seen a dip in international enrollments in recent years, the falling Aussie dollar and simplified visa process should spark a resurgence in overseas students, placing Australia on top of their destination lists,” said the report.

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Stars aligned for ‘serious’ US correction, analyst says

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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As US stocks ease back from record highs this week, more and more traders see the SandP 500 as overvalued and are pricing in a “serious correction.”

Jack Bouroudjian, CEO of financial services holding company Bull and Bear Partners, told CNBC`s Asia Squawk Box on Tuesday he was the most bearish he has ever been on the US stock market.

“The market is overvalued and we`ve hit an inflection point. Unless we see some real strong growth numbers coming out of the economy, I`m looking at a 10 percent correction between now and October. It`s time to be very defensive,” he said.

Bouroudjian said the market`s notional value has become vastly inflated versus the country`s total gross domestic product on a historical basis, which is a red flag and could herald an imminent correction.

“Equities have historically traded at a discount to GDP except for two times in the last 50 years,” he said.
“In the late 1990`s we traded at 148 percent over GDP, and in 2007 we traded at 118 percent over. Unfortunately, both times were followed by a serious correction. We are now at 110 percent.”

“The time has come to say that the `easy` money in equities might be behind us unless we see real growth in the GDP numbers and forecasts increase for top line revenue from corporate America over the next couple years,” he added.

Bouroudjian`s comments underscore the cautious tone surrounding the US stock market that has emerged recently, as industry watchers start to doubt just how long the good times can last. Wall Street traders have also flagged several occurrences of the `Hindenburg Omen` in the past few weeks, a technical indicator which predicts the potential of a financial market crash.

The SandP 500 index is up over 18 percent since the start of the year, boosted by more signs of an economic recovery, particularly in the housing market and employment, although it has in the past week eased from record highs seen earlier in the month, due to thin summer trading volumes and continued worries over Fed tapering.

According to Bouroudjian, another trigger point for a market correction could be the appointment of a new Federal Reserve chairman after Ben Bernanke`s term expires in January.

“Twice in my investment lifetime, we have changed the Fed chairman. We changed it when (Paul) Volcker changed to (Alan) Greenspan (in 1987) and when Greenspan changed to Bernanke (in 2006). Both times were followed by a serious correction in the market,” he said.

“I’m not saying it will happen again for a third time but I am very defensive because of that too,” he added.

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Slowdown not stopping Australia’s millionaire factory

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Australia’s once-resilient economy may have finally succumbed to headwinds, but that won`t impact the pace at which the country is minting millionaires, a new survey shows.

The number of millionaires in Australia is expected to grow by 33 percent in the next four years, according to research firm WealthInsight, despite a peak in the mining investment that has been driving its economic growth and a slowdown in its largest trading partner China.

“By 2017, there will be an estimated 402,000 millionaires in Australia, a 33 percent increase from 2012. The majority of these new 100,000 millionaires will earn their wealth from financial services,” a WealthInsight report said this week.

Oliver Williams, financial services analyst at WealthInsight said financial services is becoming the new “bastion” for Australia`s wealthy.

“Although Australia`s established multimillionaires, such as Gina Rinehart and Clive Palmer, still have large stakes in the mining sector, most of the country`s emerging millionaires are profiting from financial services,” Williams said.

Currently, more than 18 percent of millionaires and over 15 percent of multimillionaires – defined as those with more than USD 30 million – in Australia acquired their wealth from financial services, while the next largest sector at 14 percent is basic materials, which includes mining and metals.

Financial services already accounts for 10 percent of Australia`s national output, according to Williams, who said the sector is likely to become even more highly competitive as investors pile in.

“Since 2007, the number of millionaires who acquired their wealth from financial services has grown 28 percent, more than any other sector, including Australia`s previous bastion of millionaire wealth – mining and basic materials,” the report said.

Last year, Australia`s benchmark SandP/ASX 200 stock index made gains of nearly 15 percent and is up more than 10 percent so far this year to 5,157. It was one of the best performing stock markets in the Asia-Pacific region in July, rising 5.5 percent, marking its biggest monthly gain since November 2012.

The spreading of wealth

Australia`s wealth per capita at USD 344,000 was the second highest in the world in 2012 after Switzerland at USD 498,000, according to WealthInsight. That compares to a global average of USD 28,000.

Still, Australia`s millionaires collectively account for only 15.5 percent of the country`s wealth, which is about half the 29 percent global average.

“This reflects a very equal distribution of wealth in Australia,” Williams said. “Although we see billionaires earning stratospheric amounts, the reality is they are a tiny minority in what is a very equal economy.”

In terms of cities with the most millionaires, Sydney, Australia`s financial center, is at the top, accounting for 27 percent of the country`s millionaires, followed by another major city Melbourne at over 16 percent.

“Sydney`s huge growth in millionaires can be explained by the success of its financial industry, which now ranks above Melbourne`s. We have found that most new millionaires in Australia earn their wealth from financial services, hence the popularity with Sydney,” Williams said.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Four reasons not to ‘throw in the towel’ for India

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The rapid depreciation in the Indian rupee, sluggish economic activity and deterioration in consumer confidence have dashed hopes for a turnaround in Asia’s third largest economy. However, according to Credit Suisse, it’s not all gloom and doom for the South Asian giant.

“We have not thrown in the towel. In some ways, the current situation reminds us of when virtually everyone had given up hope of ever seeing wholesale price inflation fall and the central bank cutting policy rates further. Sometimes patience is indeed a virtue,” Robert Prior-Wandesforde, director, Asia Economics at Credit Suisse wrote in a new report.

Inflationary pressures have been easing this year, with the Wholesale Price Index (WPI), the country’s main inflation gauge, rising just 4.86 percent in June compared with the near 8 percent levels seen in 2012. This has enabled the Reserve Bank of India (RBI) to cut interest rates three times this year.

Credit Suisse which forecasts gross domestic product (GDP) growth of 6 percent for the current fiscal year ended March 2014, on the higher side of market expectations, said its optimism lies in four main factors.

Prior-Wandesforde argues that as long as the RBI’s recent moves to tighten liquidity through increasing short-term borrowing costs for banks – in order to make it more expensive for investors to short the rupee – is not a precursor to a hike in the benchmark interest rate, the damage from tighter liquidity conditions is likely to be limited.

“This is our central view but does depend on the policy authorities acting in a quick and credible fashion to shore up the currency,” he said. The rupee has fallen 11.3 percent against the US dollar this year.

“Judging from the central bank’s post meeting statement and press conference on 30 July, it has no intention of following up its liquidity tightening measures with a policy rate move. Rather it gave the strong impression that it actually was itching to undo the steps it had already taken in order to re-focus on boosting economic activity,” he said.

Secondly, he said that growth is unlikely to be as stunted as it was in the second half of financial year ending March 2013, when fiscal policy was being tightened to curb the government’s deficit.

In addition, the county’s exports are set to benefit from a weaker rupee and global demand picking up, he said. India’s exports improved significantly in July, rising 11.6 percent year on year.

Lastly, this year’s favorable monsoon rainfall is positive for the county’s key agriculture sector, boding well for crop production and possibly food inflation, Prior-Wandesforde said. The monsoon is critical for 55 percent of Indian farmland that does not have irrigation.

“Overall, we believe the fundamentals are clearly more supportive of activity in 2013/14 than they were in 2012/13, suggesting economic growth should also be meaningfully stronger,” he said.

Prior-Wandesforde acknowledges that there are risks to his outlook, in particular one: “the damage to India’s normally strong ‘animal spirits’ from the numerous corruption and governance scandals.”

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Weak dollar? Maybe mkts are finally believing the Fed

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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I’ve been wondering recently: why is the dollar falling? This question disturbs me a lot, because frankly, I thought it was going to continue to rise based on the divergence in monetary policy between the Fed and the other major central banks.

But as it turns out, there is a difference between what the other central banks say and what they do. While the Fed is openly debating whether to begin tapering off the pace at which they expand their balance sheet, in fact several other major central banks have already started shrinking their balance sheets.

That may prove to be a headwind for the dollar for some time until the difference in monetary policy reasserts itself, probably in the first instance by those central banks that have stopped expanding their balance sheets taking other measures to loosen policy.

The most immediate reason why the dollar is weakening is probably that the Fed has managed to convince the world that tapering off its quantitative easing program has nothing to do with tightening interest rates.

At first the market assumed that “tapering” also meant “hiking” and that short-term interest rates would go up sooner than they had expected. But many Fed officials have tried to clarify that the decision to taper off QE is totally separate from the decision to raise interest rates.

The markets seem to believe this now and rate expectations have fallen back sharply.

For example, the June 2016 Fed Funds futures were implying a rate of 1.82 percent on July 5th, the day they peaked, but have since fallen back to only 1.42 percent, so, down about 40 bps off the highs. This fall in interest rate expectations has naturally hurt the dollar.

Furthermore, a lot of investors seem to worry that the first tapering will be accompanied by some reaffirmation of the dovish outlook, as Mr. Bernanke seems to be taking considerable pains to reassure investors.

But here’s the funny thing. In fact, while everyone is worried about when the Fed is going to start tapering off its QE program, in fact several other central banks have already started to taper off.

During 2012 the Fed’s balance sheet actually shrank while other central banks strongly expanded their balance sheet. The gradual impact of this change may have been one reason for the strength of the dollar this year.

But since the beginning of this year, the Fed’s balance sheet is up 23 percent, but the ECB’s balance sheet is down 21 percent. Even the Bank of England, which is complaining that the market is too pessimistic with regards to interest rates, has let its balance sheet shrink by 2.4 percent from its peak. Its balance sheet hasn’t grown at all this year. The Swiss National Bank balance sheet also peaked in March and has been shrinking since then.

Meanwhile, the Fed’s balance sheet keeps growing, and of course what the FOMC means by “tapering” is just that they will slow the pace of its expansion,not shrink it. So it may be that the tapering argument is not such a strong support for USD in the first place as other countries are doing similar.

The ratio between the Fed and the ECB’s balance sheet is now at a record high. The last time the ratio was around this level, EUR/USD was close to 1.50!So this is consistent with a much higher EUR/USD.

Of course, this ratio is not entirely appropriate for the ECB, because in fact the ECB can’t really do QE like other central banks do. It’s forbidden from buying bonds directly from the market, so it can only expand its balance sheet through lending. If banks don’t want to borrow, there’s nothing it can do.Recently the banks have been repaying their long-term refinancing operations,with the result that the ECB’s balance sheet shrinks.

But the Bank of England does have control over its balance sheet. As it has stopped increasing the amount of its bond purchases outstanding, the Fed’s balance sheet has been expanding relative to the BoE’s. That too should be pushing GBP/USD higher.

The case of the Bank of Japan is a bit different. The Bank of Japan’s assets are indeed growing faster than the Fed’s, and the currency pair has moved appropriately. However USD/JPY has risen much faster than the ratio of the two balance sheets.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow