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I'm less concerned about the inverted yield curve -- tightening a bit short term could instill continued confidence that inflation won't become a problem in the future and, a la the Fisher Equation, generate the inversion.

What puzzles me is the slight u-shape to the yield curve. What on earth causes that?

Did you see the yield curve graphs in this NY Times piece?
http://www.nytimes.com/2006/01/08/business/yourmoney/08view.html
The UK yield curve appears to have been inverted for a year.

Australia too has had an inverted yield curve for some time. The UK is a more comparably sized economy with a similar outsized residential real estate market, but I wonder if the US economy is still different enough (ie relative global giant) to hold some reservations about these comparisons. Argentina could not carry a 6% debt/GDP load, so many (among them, Setser and Roubini) wondered about what the US could carry. More than 6% apparently, but perhaps not much more.

I'm not sure how firmly we can tie inverting yield curves to currency fluctuations, but the confidence level expressed in the following seems a tad heavy:
"No-one's going to make any particular effort to prevent their currency from appreciating against the CAD, and since Canadian macroeconomic fundamentals are so strong, the only major thing that we have to worry about is the possibility of a US recession."
The CAD has been targeted in fx markets before and some feel that their outsized trade position with the US puts them at more risk than say, Korea whose fx positions are currently attracting some attention.
It looks like Korea's substantial US reserves are insufficient to maintain (against currency speculators) a competitive currency. It looks like foreign cbs can be manipulated to buy US tbills and exacerbate a dismal looking US trade position.

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