If you hope to follow the old adage to sell in May and go away, maybe just wait until after the 16th...
If you hope to follow the old adage to sell in May and go away, maybe just wait until after the 16th, when the US Federal Open Market Committee next meets to decide on the US Fed Funds rate. They will have US consumer price index data released only hours before to chew on and their reaction will be carefully watched around the world... and that includes You, in your beach trailer in Devon.
We have got used to a certain equilibrium in world currencies over the past few months. Indeed the markets have become so predictable and efficient that the big currency hunters like George Soros reckon the game's too tame. They've retreated to their treetop hides to scan the markets for some other limping target to maul. I, for one, don't buy the retirement story-like Arnie with his Uzi 9mm, they'll be back, just as soon as they spot a worthwhile firefight.
So, we are used to a strong dollar, an improving yen, an overvalued pound and a relentlessly sliding euro. But now the established world order is shifting. In the last week, the euro (with no thanks to the European Central Bank) has woken up, and even clawed back a cent or two. Sterling has fallen against the euro and is suddenly at a four year low against the dollar.
The UK manufacturing sector contributes a perfectly respectable 20% to UK GDP, and we were all very sympathetic to the plight of UK exporters, who have been squeezed 'til their pips squeak. But hang on a minute! Energy costs are still rising (nice for some-BP Amoco reported Q1 2000 profits up 256% year-on-year and 28% quarter-on-quarter) and we are going to start feeling some non-seasonal heat.
The UK's latest inflation report prompted the Bank of England Monetary Policy Committee to keep the base rate at 6%, where it has been for three months, but the MPC acknowledges that inflation is reaching towards the government target of 2.5%. They have been relying on the strong pound to keep a lid on it, but if sterling is now easing off, inflation will get a boost.
In the good old days, central banks could rely on each other for a bit of assistance in such situations. There was nothing the currency traders feared more than concerted intervention. But now each country must paddle its own canoe. There was precious little help for sterling when it was pushed out of the Exchange Rate Mechanism; the Fed stood back as the yen rose and rose, and even though he wants to, old Wim Duisenberg at the ECB can't get the traders to fear him.
However, the Mother of all Big Guns is being primed, even as we speak. The Fed is widely expected to slap the disrespectful markets with a whacking great 50 basis point rise in the Fed funds rate, which will bring everyone still floating back down to earth with a bump. There have already been five rate rises in the US since last June, but the economy is still growing strongly.
The Paris-based OECD, which has the luxury of dispensing advice without actually have to run an economy, wants harsher punishment, and is calling for a full percentage point rise by the end of the year. The problem, it says, is that US wage pressures show no sign of abating, and the rising trend in inflation is becoming entrenched in popular expectations, and therefore harder to reverse. The Fed, long exasperated by markets' enduring exuberance, might be of a mind to listen.