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.

Labels: , ,

Tuesday, May 08, 2007

Is it Shadenfreude?

EUR/USD 1.3533 Hi 1.3622 Low 1.3514
USD/JPY 119.92 Hi 120.16 Low 119.52
AUD/USD 0.8273 Hi 0.8312 Low 0.8242
EUR/JPY 162.30 Hi 163.42 Low 161.89

Well France has replaced the Paternalistic Tall Guy with the Confrontational Short Guy. The Anglo-Saxon press is cheering. Could this be Schadenfreude? Finally the snobby and complacent French get to deal with a political reincarnation of Mrs. Thatcher. Stand by for Winter of Discontent Mark II. It's all been done before. All you need is bolshie Unions and a confrontational politician at the head of a right-wing Government. First the bolshie Unions strike and ensure the maximum discomfort out there in the general populace. Then the right-wing Government takes on the Unions with support from the très annoyed general populace. Then the Unions lose. A that point Corporates get to set the agenda which does not include better working conditions or better public services. But it takes a while. For now France is set for CONFRONTATION. Strikes are already under way.

Of course there is the added bonus that President Sarkozy will a) fall into line with the Foreign Policy of George W. and b) endorse the resuscitation of the European Constitution which the French voted down in 2005. So we are on track for a French Republic which ignores the wishes of the people. This could get interesting. As in violent. After all this is France.

Meanwhile across the Atlantic the Queen of England is visiting, which is a blessed relief for George. Now he gets to go to some garden parties and the only speeches he flubs are ones about history. And no-one expects him to get his history right anyway. So the heat is off. Mixed in with headlines about Iraq, Wolfowitz, Gonzales, the impeachment of Cheney etc. are lots of cheery sound bites about Her Majesty.

And the Stock Market is riding high. That old warmonger, Rupert Murdoch, helped spur the Dow Jones Index to yet another record close last week with his well-timed bid for, er, Dow Jones. So the situation is under control. Although there are challenges ahead.

Central Banks will be reporting in this week. In the U.S. there is a good chance that Bernanke will hold to his recent "anti-inflation" stance tomorrow. That won't be well received. Especially now that it has been confirmed that U.S. growth is slowing and that job growth is suffering. The "market" is still holding out for some relief from good old Bernanke in the way of rate cuts. There could be some disappointment. In the U.K. another rate hike is expected Thursday. Inflation, Central Bank independence and all that. At some point joining the Euro will start to look like the easy way out for the Brits. So expect the interest rate squeeze in Britain to continue. And we get to hear from our old friend, Trichet. No rate hike is expected in the EuroZone this week but we will all get a chance to interpret Mr. Trichet's "codes". "Extreme Vigilance" and a rate hike is a done deal for June.

Despite the rate hike outlook in the EuroZone, the Euro continues to struggle. All the good news is already "in" the market and slightly less exciting news has emerged. And that's without even taking into consideration the potential for social unrest in France. The nice safe trends: buying EURO against JPY and USD both look like they are in trouble with more to come.

But where it could get really interesting is in the USD/JPY. Which is holding valiantly but looking increasingly dented. No sign of panic. But USD/JPY has been the trend of trends for more than a year. When it turns, and it looks like that is happening now, it could do real damage.

OIL 61.50
GOLD 685.50

Commodity prices continue to struggle. All the good news is long gone and despite all the positive "analysis" the outlook for the global economy remains clouded. More downside is on it's way.

GOLD has been bouncing around a lot lately. But it hasn't broken to the upside. Neither has it broken to the downside. With the USD in recovery mode against the EURO and given the weakness in commodities generally, unless we have a break out in GEOPOLITICAL mayhem (always possible) or a significant fall in the USD index, the risks for GOLD for now remain to the downside. This is not a longer term trend, but it's a trend nevertheless.

Labels: , ,

This page is powered by Blogger. Isn't yours?