Key News

• South Korea, Asia's fourth-largest and a leading export economy, has frequently suffered dollar funding shortages when global credit markets dried up on economic concerns. Earlier in the day, ADB said Asia's strong growth outlook and prospects for better returns would lift capital inflows into the region but that could increase appreciation pressure on currencies, which may require authorities to impose capital controls. (Reuters)
• Deflation Threat Likely to Keep Cap on Rates (Wall Street Journal)
• Inflation: U.K.’s Next Big Problem? Is inflation Britain's next big problem? The debate over that question is likely to heat up given Tuesday's alarming news that Britain's inflation rate hit 3.7% -- well over the Bank of England's 2% limit. (Wall Street Journal)

Quotable

“Do not be too moral. You may cheat yourself out of much life. Aim above morality. Be not simply good; be good for something.”

                           Henry David Thoreau

FX Trading – Remember Latvia?

Latvia: they were a big deal about a year ago, and maybe even before that, when the lending practices among Eurozone banks, EU countries and CEE countries posed a huge risk to growth across the region.

Latvia, as did the other Baltic States, watched its GDP crater. Those lenders exposed to such a dramatic decline in Latvian growth certainly felt similar pain. Here’s a snapshot of Latvian GDP, percent change year-over-year:

The red indicates the forecasted change in GDP in 2010 and 2011. It’s quite a dramatic snap back from the nearly -20% reading back in September 2009. But as you can see from the beginning of that chart, this isn’t totally new to Latvia – they’ve undergone severe contraction followed by equally sharp rebounds in GDP numbers. They’ve got a stomach for this kind of stuff.

That’s the reputation of the Baltics anyway. So maybe it shouldn’t be a surprise that Baltic leaders took the approach they did when GDP was spiraling lower. As Latvia’s prime minister recently said, “Austerity was something we had to do in all three Baltic States, if to different extents. Yes, we were able to pursie those difficult decisions, and in the case of Latvia made fiscal consolidation of more than 10% of GDP, which certainly is a huge effort. Just now we see stabilization, and I would even dare to say an improvement of the situation.”

Austerity – there’s a word you don’t hear everyday ... errrrrrr?

So can the approach taken by Latvia teach other countries, say, uhhh, Greece, a lesson about swallowing the pill and trimming down on government spending? Maybe. It may not be the answer in all cases, but it sure can’t hurt.

But as one commentator noted, the Baltic States can swallow this sort of thing better than, say, uhhh, Greece, because “due to the unionization and militancy in other countries they may simply not be able to see it through.”

And there’s another key point: the measures taken to alleviate the pressure in these Baltic nations involved devaluing their currencies, something that the member countries in the Eurozone cannot do independently of one another.

Certainly the price action in the euro of late has helped to push the value of the lat lower, but based on the relatively lower peak and the now lower low that’s broken the credit crunch lows, it’s apparent that Latvia’s been at work fixing things.

Latvia’s Finance Minister recently said, “We are able to keep fiscal discipline, we are able to take tough decisions, and we are moving with our internal devaluation towards more competitiveness.”

Hmmmm???