Thursday, May 15, 2008
One of the inevitable outcomes of the Three Axioms is the rising importance of the new entrants/BRICs in global financial markets. However, as Macro Man has observed on and off since the creation of this space, these new entrants don't always follow the same rules and conventions as existing participants. Scanning the headlines over the past twenty four hours provides a couple of particularly egregious examples of this "21st century policymaking."
Yesterday, the central bank of Russia announced changes to its currency regime. Ostensibly, this was to "help fight inflation", a stated aim of the Putin government. Yet the measures, which involve the potential sales of roubles for foreign currency, are pretty clearly inflationary- both in terms of weakening the domestic currency and increasing the money supply. The Bloomberg story headline gets to the heart of thissue straight away; these measures were designed to screw speculators. And so they have....the Russian basket trade, a highly popular destination for spec capital over the past three weeks, has suffered a rather ugly reverse.
So the Russians want to prevent foreign currency speculators, even to the cost of increasing domestic inflation. Meanwhile, the CBR runs over the EUR/USD market on a daily basis, while Russian "private sector" banks (Kleptokratbank Nizhny Novgorod, Oligarkbank Arkangel) regularly treat currency markets like an orca treats a baby seal. So while the Russkies are more than happy to speculate in your currency, they'll shoot themselves in the foot to stop you from speculating in theirs.
The race for energy, meanwhile, is becoming more visible in developed economy equity markets. China, for example, has seen the price of its energy imports skyrocket, particularly coal. Despite attempting to apply heavy pressure to their Ozzie "partners", Chinese importers have been hit with price increases of several hundred percent. Although Macro Man cannot find a price series for Aussie coal export prices, the chart below (coal products in the PPI) give you a flavour of the trend.
So imagine the Chinese dismay at the thought that two of their main suppliers, Rio Tinto and BHP Billiton, might merge, thereby giving the combined firm even greater pricing power. So what's a 21st century Machiavellian to do? It's obvious! Take advantage of the relatively open markets of the developed economies and buy a stake in each company to prevent the merger.
Now in fairness, Chinalco was joined by Alcoa in buying a decent chunk of Rio. But Alcoa is a private company; Chinalco isn't. And it is only the word on the strasse is that it is Chinalco
buying up a stake in BHP. Still, it's hard to imagine China looking too kindly on, say, the Australian Treasury lending BHP A$50 billion or so to buy up resources in China. In fact, such a proposition is little short of preposterous. So it would be kind of refreshing if the new Aussie premier Kevin Rudd got his Chinese counterpart on the phone and said "kindly f*** off."
If only somebody would tell SAFE's FX trading desk (pictured left) the same thing....