Wednesday, May 09, 2007

Timing is Everything

EUR/USD 1.3540 Hi 1.3554 Low 1.3534
USD/JPY 119.81 Hi 120.07 Low 119.66
AUD/USD 0.8288 Hi 0.8298 Low 0.8263
EUR/JPY 162.25 Hi 163.61 Low 162.06

Thursday the Bank of England is expected to raise rates. AGAIN. Obviously the move will be unpopular. Though the pundits and the apologists for Central Bank Independence will cheer. Inflation you see is the enemy and it can only be fought with Central Bank Independence. Yada, yada, yada. Still people with debts (that is everyone in the U.K.) won't be happy. Something must be done. No, they're not going to keep rates steady. What they need is a DISTRACTION. Right. So what can be done? Well how about this? How about Tony Blair announcing his exit plans Thursday? That should work. Tony the arch media manipulator is on the job.

The idea is simple: when unpleasant things happen get the coach potatoes out in Voter Land to focus on something else entirely. And that idea is based on the belief that the electorate is stupid. And it does seem to have worked as a strategy. Up to a point.

Tony Blair's track record is a series of failures: the reform of the National Health System, Railtrack, the reform of public education and, of course, Iraq, shoulder to shoulder and all that. And despite this string of failures, a revolving door of cabinet ministers, despite the draconian restrictions on civil liberties which have been introduced in Britain but which nevertheless failed to prevent terrorist attacks and despite widespread voter dissatisfaction, there is only one message out there: Tony Blair is the most successful Labour leader since WWII.

In the sense that he has managed to hang on to power for a long time.
And in Politics these days that is all that matters. Success is not about achievement it is about to hanging on to power. First you say whatever you need to get elected and once elected you do exactly as you please provided you can hang on. And the key to hanging on is the media. So the only thing that matters post-election is controlling the message in the media. And Tony has proved an expert at staying "on message", SPIN and media timing. And HANGING ON. Mostly Tony has been very, very good at HANGING ON. But it's all starting to look a little tired. And Tony now has become a political liability for the Labour Party. New Labour is over. SPIN, unfortunately, is still with us.

Today we get to see how good Bernanke is at SPINNING the message. Rates are expected to remain unchanged in the States. So with nothing actually happening to RATES, the market will parse the FED statement for clues instead. Everyone now knows that U.S. economic growth is under strain and the market will be looking for some relief in the form of lower interest rates. Or at least the hint that rates will fall some time this year. The idea being that if rates go down the Consumer can go deeper into debt and start the party up again. But that party is over. There is a limit to how many times you can play this game. The 'game' has changed and the market doesn't seem to have worked that out yet. Eventually the new reality will have to be factored in. Weaker economic activity in the States is not necessarily going to lead to lower rates. As a debtor nation the United States must set monetary policy with one eye on the USD and another eye on international capital flows. Neither leave room for rate cuts. For now, the idea seems to be: let's pretend that nothing has changed. It can't last.

Weak U.S. economic activity has already started to hit home with Asian exporters. Toyota just announced the slowest profit growth forecast in 10 years as a result of weak U.S. demand. Expect more headlines like this going forward. The export-orientated model for economic growth has been adopted by the entire Asian region. And the model worked successfully provided that foreign markets for Asian products remained strong. Asia is no engine for growth. It is simply the "beneficiary" of excess U.S. demand. Demand which ironically it was also largely responsible for financing. Ultimately that is an unhealthy and unsustainable relationship.

Just as it will be near impossible to quarantine the impact of the slow down in the U.S. Housing Market on overall U.S. growth it will be near impossible to contain the impact of the U.S. economic slow down on world growth. Weaker economic times lie ahead. Thank increased international economic integration and trade for that.

The EURO correction is not over but the USD/JPY correction may just be starting. Everywhere there is a rush for the exits. Call it profit taking. No-one wants to be the last to leave the party. Especially when it's a speculative free-for-all.

OIL 62.25
GOLD 687.80

Everything is in limbo as the market waits for new news. We need to see what happens with rates this week and how the USD reacts before any break out can be expected on commodity markets.

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