Friday January 18, 2008 - 19:08:16 GMT
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FX Briefing -
FX Briefing 18 January 2008
Â· ECB hawks back down
Â· Bank Lending Survey shows lending constraints in the EMU
ECB stance softens
EUR-USDâ€™s foray into 1.49 territory was cut short in the middle of the week, when ECB representatives struck a more dovish tone. The euro slipped to about 1.4650 against the US currency; EUR-JPY fell to below 158 during the course of the week. Bundesbank president Axel Weber confirmed expectations that the inflation ratewould fall below 2% again in 2009. Prior to that, Lorenzo Bini Smaghi and Michael Bonello from Malta, who has recently joined the governing council, had made similar comments. Axel Weber even went as far as saying that the current level of inflation should not be overdramatized. His Luxembourg colleague Yves Mersch said that so far there was no evidence of second-round effects. He also indicated that the ECB might revise down its growth forecast. The comments made by central bank representatives, particularly the hawkish ones, show that there is growing concern in the ECB about the macroeconomic consequences of the credit crisis.
The ECB bank lending survey, which has just been published, shows clear signs of credit tightening: corporate lending standards were tightened significantly in the fourth quarter and credit lines reduced, partly because banks see higher macroeconomic or firm-specific credit risks, and partly due to bank capital limitations and funding constraints. Demand for corporate loans has weakened somewhat, mainly due to a decline in M&A activities. Demand momentum from fixed investments has been declining. Standards for consumer loans have been tightened too; but most remarkable here is the noticeable drop in demand, particularly for mortgage loans. On the whole, banks are expecting financing constraints to continue as a result of the crisis, and credit standards to be tightened further in the coming months.
In addition to this, the situation in the US has been deteriorating further. The December data shows weaker retail sales; the New York Empire manufacturing and the Philly Fed index suggest that the January ISM will remain below the expansion threshold again. Stocks also started the year on a weak footing, partly due to the results released by banks and other financial services. In the US there is now increasing talk of an impending recession. Last week Fed chairman Ben Bernanke promised substantial monetary policy measures, and the White House is preparing an extensive fiscal package to stimulate demand.
The ECB cannot keep on disregarding the economic risks and their implications for the medium- term inflation outlook. In the coming weeks, the central bankâ€™s official comments will probably be slightly more balanced. But as long as inflation rates remain this high, the ECB will be loath to cut interest rates. However, we think that this barrier will be overcome by mid-year.
Despite expectations of monetary policy easing in the EMU, we see the euro remaining strong. In our view, exchange rate trends will be determined mainly by the direction of US monetary policy (which mirrors the US economy) and the US dollarâ€™s significant interest rate disadvantage â€“ over 100 basis points for 2-year Treasuries.
Stephan Rieke +49 69 718-4114
+49 69 718-3642
Foreign Exchange Trading
+49 69 718-2695
Matthias Grabbe / Klaus NÃ¤fken
+49 69 718-2688
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