Overview
Front page news as the pound trades above $2, setting a high of $2.0134 and its strongest since 1981. The point many are missing is that year-to-date it is only the 8th best performer, trailing the Aussie and Kiwi, Real, Nokki, Canada, Danish krone and the Euro. The problem is that we don??™t know the important levels for these so are unaware just how weak the US dollar has become. US economic releases have not been that interesting; just slightly on the weak side of things so that yields have reversed most or all of April??™s back up. The exception was New Zealand: ten-year Treasuries yields rose to 6.30% because Q1 CPI +2.5% Y/Y, within target but housing still a problem, so further rate rises are a possibility. Brazilian benchmark 2014 bonds yield just less than 5.50%. Commodities have been sidelined much of the time, Platinum Group metals and Gold rallying to multi-month highs, FCOJ and Cotton collapsing, Softs drifting and Grains with an underlying bid tone. European and US stock markets rallied for a third consecutive week with some posting new highs for this year. Australia, Brazil, all three Dow Indices, Hungary, Indonesia, Malaysia, Mexico, Poland and South Korea set new all-time highs.
Political and Economic Developments
UK March CPI running at 3.1% forced Bank of England governor King to write a letter explaining himself to Chancellor Brown. On the old RPI basis it is 4.8%, higher than it has been since August 1991. Admittedly this is the first time he has had to put pen to paper since the Bank??™s independence was established ten years ago, but the haste with which his (slightly weak) explanations were accepted highlight a key flaw in the system: the politician??™s need to distance himself from the problem and a gauge of how soon he will grab the PM??™s job. Monday??™s Money Supply number might be scrutinised more closely than usual: M4 is expected to grow by 12.5%, down from September??™s 14.4% and the highest rate since September 1990. Interest rate futures are pricing three-month Libor at 5.75% by mid-June.
Underlying Themes
The US??™s deadliest massacre at Virginia Tech this week again highlights the problem of young men with guns. The ease with which the demented can get hold of these, police inability to control their spread, the importance of gangs in society and the use of knives by children are big problems in today??™s world. Governor of Rio de Janeiro Sergio Cabral has asked the army to come and help control his lawless metropolitan area. Yesterday Copacabana beach became a rose garden with 1,300 red roses marking each person who had died because of violent crime since January. The city has a homicide rate of 40 per 100,000 with daily shootouts between rival drug gangs and the police; Brazil is the fourth most violent country with 45,000 killings annually.
What to watch for next week
Saturday 21st Nigerian presidential and national assembly elections; Sunday 22nd the first round of French presidential elections plus parliamentary elections in one-party Syria. From Monday German March Import Prices, Japan Supermarket Sales, UK Money Supply, Bank Lending and Public Finances, then Eurozone 2006 Budget Deficit. Tuesday Japan March Corporate Service Prices, EZ February Current Account and Industrial New Orders, UK April CBI Industrial Trends, US March Existing Home Sales and April Consumer Confidence. The Bank of Canada decides on rates (unanimously expected unchanged at 4.25%). Wednesday Japan??™s March Trade Balance, German April IFO, UK Q1 GDP, US March Durable Goods Orders and New Home Sales, plus the Fed??™s Beige Book. From Thursday April CPI for the different German states, Japan April Small Business Confidence, UK Nationwide House Prices, German May GfK Confidence Survey, and US March Help Wanted Index. Friday early Japan March Jobless, Overall Household Spending, Industrial Production, Retail Trade, Housing Starts, Construction Orders, National CPI and Tokyo April CPI, plus the Bank of Japan decides on rates (unanimously expected unchanged at 0.50%). Later US Q1 GDP, Employment Cost Index and final April University of Michigan Confidence. Monday the 30th is Green Day holiday in Japan while Tuesday the 1st May is a Labour Day holiday in a great many countries.
Positioning and Technical Analysis
We shall allow for big sudden moves throughout the whole of this month and probably in early May too. The risk of another clearout of shaky longs in the ???carry trade??™ is high and we urge extreme caution. US dollar weakness may accelerate sharply as we break through yet more key levels, and moves may snowball into something quite scary. Politicians and central bankers may try to stem the tide with the usual inane mutterings. Anything priced in dollars has this underlying bid but a weak greenback will have a more complex and tricky effect on non-dollar assets. Energy prices are likely to start moving higher again. Yields will probably hold unsteadily at current levels; likewise equity indices.