EURUSD is testing its 200-day MA, always a significant resistance/support level, but this time the impulse is generated by the apparent strength of the U.S. recovery with ADP numbers providing today`s justification for the Euro sales. In Europe meanwhile, the CDS market is quiet, and volumes are light, but ECB officials are grumbling about inflation, but it is unclear if they will, at any point, move to raise rates. Clearly, raising rates is not what the market envisions for the ECB at the moment, although perhaps the same cannot be said about Europe`s citizens, who are feeling the impact of the depreciating Euro in the loss of their purchasing power. Matters have not yet progressed to a level that would make an ECB rate rise a serious possibility, but if the Euro continues to depreciate, and commodity prices remain robust, there is a chance that the ECB will have to raise a few times if only to maintain the facade that it is acting to ensure that its legal obligations are being met. Meawhile, in spite of a generally optimistic mood, Ireland`s CDS are back around the 620 bps level, which is the record set before the bailouts in 2010, but volumes are said to be light.
In the East, much of the focus is on the oncoming talks between the presidents of the U.S. and China. Today, as we noted here, Yang Jiechi and Tim Geithner met to discuss some of the usual points of contention between the two nations, and while neither side would like to see an open and public break, it is clear that the viewpoints are opposed to each other in most topics. The U.S. wants to convince China to adopt a position that is to the benefit of the Chinese themselves, while the thankful Chinese are more interested in defining what is good for them. Be it as it may, we believe that this year will see some interesting developments in this crucial relationship, and, as it is obvious that the Chinese will not cooperate with American demands, appeals to the WTO in order to sort out the trade disputes are highly likely.
Our assessment of President Hu JinTao is that he is an incorruptible traditionalist in both his commitment to the power of the CCP, and the role of China as benevolent contributer to world peace, even though this may not be appreciated in the same terms by outsiders. We believe, therefore, that the complaints and protests voiced by the Chinese are for the most part genuine, and not just the consequence of pragmatism or opportunism, as they are generally believed to be. But this makes the issues at hand even harder to resolve, because, as both sides see the bilateral issues from a perspective of morality and right or wrong, the tendency, the desire to compromise is lessened, leading to the deadlocks that we are observing. The U.S. has a lot of qualms about certain aspects of China`s economic model the predatory practices by government authorities against foreign companies, forced technology transfers, and the lack of intellectual property protection through legal channels. These are of course not new; but now that the symbiotic relationship between the U.S. corporate sector and the exploited Chinese labor force is less profitable, and open to question due to rise of domestic unemployment, that which was easily ignored yesterday makes it to the top of the agenda in today`s discussions. For the Chinese, not much has changed, since they would like to go on with business as usual for as long as possible, but that is certainly not a possibility in this fundamentally different world that we live in after the events of 2007-2009.
A breakdown of relations between China and the U.S. would be disastrous for the world, but we suspect that a significant worsening of relations is almost impossible to avoid given the difficulties faced by the rulers of both nations. American politicans need scapegoats, since they won`t get any more votes by telling the people that they are living with the consequences of their past excesses. Since the so-called Islamic Terrorism is no longer a matter of excitement nowadays, the most obvious target for blame is China, with its obsolete and alien form of government, distant and foreign culture, large size, and its potentially dangerous ascent into world power status in the course of just 20 years or so. The Chinese, on the other hand, have to control a jingoistic population that is already dissatisfied with the way the government handles international relations, and, if the economy slows down considerably, will probably demand a hardline approach to foreign affairs in order to continue to tolerate communist rule. Let`s not forget for a moment that the world is changing, and controlling a sophiticated urban population is not as easy as it is to keep a largely illiterate mass of peasants under the thumb. All these, and many other factors imply to us that the U.S.-Chinese relationship will go through some severe tests this decade.
Against all these the coming talks between Presidents Hu and Obama are important, but are unlikely to generate groundbreaking changes. In a sign of this, today the Chinese were repeating their conviction that the yuan issue is unrelated to the trade imbalance between the two countries, just one day after the President, National Security Advisor Tom Donilon, and Yang Jiechi met to discuss the issue of trade imbalances. The developments so far leave little cause for being very encouraged about how the matter, but we`ll continue to keep track of them because of their pivotal role in determining where the world economy is headed.
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