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China’s hike in banks’ reserve requirements today indicates that capital inflows remain a major problem for EM policy-makers. Concerns about a currency war have thus remained prominent. Yet rather than aggressively fighting a currency war with every tool available, EM central banks seem to be keeping the blunt tool of policy rate cuts away from the skirmish so far. Rather, they seem to prefer the well-directed tool of FX intervention to soak up capital inflows and consequently increase FX reserves. Enhanced capital flows to emerging markets courtesy of QE2 have produced varying degrees of discomfort in the EM world. QE2, we think, creates two ‘blocs’ among EM economies. The first bloc, with economies at risk of overheating, would allow currencies to appreciate and dampen domestic growth and inflation. The other, with fewer concerns of overheating, would find currency appreciation unwelcome. This second bloc would likely act to stem the appreciation, and end up stimulating domestic growth. Getting a hands-on perspective from our EM economics teams, we find that this split is indeed borne out. p 2

Central Bank Watch US: Trade Tailwinds: Coming Strongly in 4Q p 7

Euro Area: Decision on Refi Operations in Dec. p 8

UK: BoE November Inflation Report p 8

Russia: October CPI Accelerates to 7.5% p 9

Czech Republic: Doves Still Firmly in Charge p 9

China: Trade Surplus Rebounds p 10

China: PBoC OMOs Monitor p 10

Indonesia: ‘Impossible Trinity’, No Rate Hike p 11

Peru: We Expect No Change p 11 Colombia: MPC Minutes Preview p 12

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