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Monday February 25, 2008 - 18:06:34 GMT
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Stalemate not Checkmate


The euro and the dollar traversed the bulk of their recent range this week, moving from a low of 1.4613 to almost 1.4900 but came no closer to escaping the trap that has held the pair since mid November of last year. Except for a two week dip below 1.4600 in December and briefer drops in January and February the currency pair has spent seventy five percent of this period trading between 1.4600 and 1.4900. What will it take for a break out?

The old assumptions, old meaning since last August, a weak perhaps recessionary US economy and a rate easing Fed opposed to an economically steady Eurozone isolated from American problems and backed by inflation fighting ECB, are stale but they are still with us. They are incapable of driving the euro any higher or the dollar any lower. The Fed has erased 225 basis points from its funds target rate; the US economy is barely expanding with perhaps worse times ahead; the Eurozone economy has shown few concrete signs of weakness and the one essential change, the ECB adoption of a neutral bias, was immediately and deliberately neutered by its own spokesman. The euro and the dollar have traveled back and forth over the same ground for three months because the essential rate and economic situation has not changed.

To quote John Maynard Keynes, "When the facts change I change my mind, what do you do sir". The problem for the currency markets is the facts have not yet changed.

The biggest boost to the euro this week was given by a minor US statistic, the Philadelphia Fed Survey. This is not normally a market moving item, not even on Rittenhouse Square in Philadelphia. That it was, nevertheless, the occasion, or excuse for the largest single hour rise in the euro shows how desperate traders are for news to break the stalemate between the euro and the dollar. One thing seems certain traders will take not the euro to new highs based solely on poor US results but they will require positive Eurozone returns as well.

Even an American recession is unlikely to push the euro far beyond it old peak against the US currency unless there is evidence that the Eurozone economy will not follow America down. The euro recovery this week was not really a vote of confidence in the united currency or for the economic prospects of the Eurozone. Traders have simply pushed the equation between the euro and the dollar back to its midpoint. As the dollar was unable to push higher in the aftermath of the ECB bias adjustment because the US economy has not yet given proof that it has reached bottom, so now the euro now is unlikely to prolong its three day run to reach new highs because there is scant evidence that Europe will avoid a slowdown in turn. It will take far stronger signs of European resilience than we have seen or are likely to see, to push the euro above 1.5000 against the dollar. If the economic information is indecisive so is the market.

Friday gave another indication of the traders' mindset when the Belgium business survey showed unexpected strength in February and the market bought the euro. The small northern European country is, at least for this survey and because of the difficulty of obtaining EMU wide results, occasionally used as an imperfect proxy for the entire Eurozone. The EMU Services Purchasing Managers Index for February also gave a small boost to the euro when it came in two points above forecast.

But the Belgium survey and the services PMI are weak reeds with which to weave a story of European economic prowess. While the services PMI did have an unexpected recovery, manufacturing PMI dropped half a point and the three month average for the composite PMI (services and manufacturing) was at a two and a half year low. With EMU economic sentiment and ZEW indices at their lowest levels in more than 18 months and predicted to drop further in February, with similar dismal results coming from Germany, with Eurozone GDP growth halving from the third to the fourth quarter, with an EMU current account swinging red in December, and retail sales negative in Germany and in the EMU, a euro recovery based on Belgium and services PMI was too much too soon.

Central Banks

Federal Reserve

The minutes of the January 29th - 30th FOMC meeting indicate the governors have reduced GDP estimates for 2008 by 0.5% to a range of 1.3% to 2.0% from their previous 1.8% - 2.5% forecast. Inflation is predicted to remain above the 2.0% target range but there is no chance that this will prevent the Fed from reducing rates at least 25 bps at the March 18th meeting.

European Central Bank

The ECB successfully warned off a rapid depreciation of the euro in the wake of its bias change and with the paucity of statistics this week did not comment further on monetary policy.

Bank of England

The Monetary Policy Committee (MPC) voted 8-1 to cut rates 0.25% at the February meeting noting the balancing of growth risks and inflation dangers. David Blanchflower, the outstanding easy money advocate on the committee, voted for a 0.5% cut, citing the risk of a "very sharp [economic] slowdown".


Minutes for the February 5th meeting when the board voted to raise the cash rate by 25 basis points revealed that a more aggressive 50 point increase had been extensively discussed. According to the record, board members were concerned that the inflation situation had deteriorated and that inflation expectations had become dislodged. The discussion, in the words of the minutes was "finely balanced" with the board choosing the smaller increase in the end. This is an interesting echo of the oft stated ECB concern that inflation expectations remain anchored.

The Week in Review February 18 - 22

United States

The housing market has ceased to provide anything but bad news so the February NAHB Housing Market Index and January Housing Starts, both slightly better than forecasts, gave no support for the USD. In fact the stability is probably illusory as building permits which give a better picture of future construction declined another 3.0%.


The European Trade Union Confederation (ETUC) is an organization of 82 national trade unions with 60 million members and a designated "social partner" that holds regular "macro economic dialogues" with the ECB, the EMU and the European Commission on economic matters. It has demanded substantially higher wages for its members. "We want a pay raise we want it soon and we want it quickly", said John Monks the Secretary-General of the organization. In the past the unions have been warned by Jean Claude Trichet, the ECB President and other bank spokesman not to seek high wage increases that could spark a round of secondary inflation effects. But that charge was rejected by the EUTC, "There has been wage moderation. We are running out of patience with what is going on", said Monks. The ECB has warned that the bank could raise rates preemptively if it thought the inflation threat warranted. Recent ECB rhetoric has been aimed directly at prospective union wage settlements. The ETUC in its turn has warned of strikes, "Pay militancy has so far been limited. But this cannot continue in the face of rising prices". Is this the normal rhetorical posturing before wage negotiations or is it more indicative of the non-negotiable demands of each side? By historical standards European wage settlements have been restrained in recent years. With gas and food prices rising fast that moderation is under serious strain as union members demand higher wage increases from their leaders. Union membership and militancy is not an ebbing force on the continent. However, the French unions, long some of the most confrontational in Europe, lost their showdown with French President Nicholas Sarkozy last year. Compromise from all sides it the most likely result.

The EU Commission reduced their projection for GDP growth in 2008 to +1.8% from the +2.2% estimate in the November report. The study cited downside risks to growth. This study uses data from the five largest EMU countries, Germany, France, Spain, Italy and the Netherlands which together comprise 85% of Eurozone GDP. The ECB GDP estimates are due in two weeks, the last being for 1.5% to 2.5% GDP growth and 2-3% inflation in 2008. A downward revision in the GDP projections' is expected. The EU Commission information usually correlates well with the ECB.


January inflation was 7.1%, the highest in eleven years and a gain of more than 0.5% in one month. Though the Chinese government has raised interest rates, reserve requirements and permitted a faster appreciation of the yuan in response to previous inflation there is some disagreement whether all those policies will be repeated this time. The January CPI increase was again led by food costs. But the food supply suffered serious disruptions in January from severe winter weather. Food prices were forced higher by supply shortages not by rising demand and those supply restrictions have since eased. There is a plausible chance that the People's Bank of China (PBOC) will recognize the one time nature of January's hike in food prices and with a world economic slowdown looming choose to forego higher domestic interest rates. China's rulers have been very good at taking the long view of their economic choices, they will probably do so again. Bank reserve requirement are expected to rise again in 2008 despite 600 bps in increases in 2007.

Economic Releases February 18 - 22

United States

Tuesday: the National Association of Home Builders Housing Market Index rose 1 to 20 in February. This index has now been stable since July, falling only once in December to 18, but it is still less than half the reading of a year ago.

Tuesday: the Consumer Price Index (CPI) gained 0.4% in January, ahead of the +0.3% forecast but lower than the December reading of +0.4%. Core CPI added 0.3%, also 0.1% more than forecast; December had been +0.2%. The +4.3% elapsed yearly CPI figure was the highest since September 2005. The +2.5% core annual rate represents a steep climb from the 2.1% rate last September; in January and February CPI was +2.7%. Housing Starts rose 0.8% in January to 1.012 million units, a bit less than he forecast of 1.020 million. Single family home starts sank 5.2%, the 10th consecutive monthly decline and the lowest level in 17 years. Starts of multi family units rose. Building Permits contracted 3.0% January to 1.048 million, the eighth monthly decline in a row.

Thursday: jobless claims for the week of February 16th slipped 9,000 to 349,000, 345,000 had been predicted. The prior week was revised 10,000 higher to 358,000. The four week moving average has now reached 360,500 the highest since October 2005. At the start of the last recession in March 2001 this average was at 373,000 but the US economy and employment rolls have grown considerably since then and the equivalent level today is probably close to 400,000.


Tuesday: construction production dropped 0.6% in December, the fourth decline in the past six months; the elapsed year fell to -3.3%. In the fourth quarter production contracted -0.3%, in the third quarter it added 0.4% and in the second it lost 0.7%.

Thursday: the seasonally adjusted current account for the EMU 13 dropped sharply into deficit in December to -€10.3 billion from the €2.3 billion surplus in November which was adjusted up from +€0.7 billion.

Friday: industrial new orders plummeted in December falling 3.6% below November's level, leaving them only 2.1% above the base of a year ago. Although a correction had been expected after the strong October and very strong November (+11.4%) numbers, a more modest decline, -1.0% monthly to a yearly level of +8.7% had been forecast. The ‘flash' manufacturing PMI for February was as forecast at 52.3, 0.5 below January's result. The services PMI was ahead of predictions at 52.3, 50.3 had been anticipated; January was 50.6.


Wednesday: the Producer Price Index (PPI) rose 0.8% in January, four times the expected increase of 0.2%. The +3.3% rate for the year is the highest since December 2006 when it was +4.4%. In December the figures were -0.1% and +2.5% respectively.

United Kingdom

Monday: Rightmove House Prices rose 3.2% in February, 5.8% on the year. It was the first rise in prices since October of last year. In January prices shrank 0.8%; they rose +3.4% year to year.

Thursday: retail sales rose 0.8% in January far more than the median prediction of +0.1%. It was the steepest rise since February 2007 and with the yearly rate now at +5.6%, it appears the British consumer is not impressed by the housing and credit market turmoil.

The Week Ahead February 25 - 29

United States

Monday: Existing Home Sales for January at 10:00 ET; expected 4.80 million, December 4.89 million.

Tuesday: PPI for January at 8:30 ET; expected +0.4%, December +0.3%. Core PPI for January at 8:30 ET; expected +0.2%, December +0.2%. Case-Shiller Home Price Index for December at 9:00 ET; November -2.1% m/m. Conference Board Consumer Confidence for February at 10:00 ET; expected 82.0, January 87.9.

Wednesday: Durable Goods for January at 8:30 ET; expected -4.0%, December +5.2%. New Home Sales for January at 10:00 ET; expected 600,000, December 604,000.

Thursday: Jobless Claims for the week of February 23rd at 8:30 ET; expected 350,000, prior week 349,000. Fourth quarter GDP 1st revision at 8:30 ET; expected +0.8%, prior release +0.6%.

Friday: Personal Income for January at 8:30 ET; expected +0.2%, December +0.5%. Personal Expenditures for January at 8:30 ET; expected +0.2%, December +0.2%. PCE Core Price Index for January at 8:30 ET; expected +0.3%, December +0.2%. Chicago Purchasers Index for February at 9:45 ET; expected 49.8, January 51.5. University of Michigan Consumer Sentiment for February at 10:00 ET, final release; prior release 69.6.


Wednesday: Money Supply (M3) for January at 9:00 GMT; expected +11.4%, December +11.5%. M3 three month moving average for January at 9:00 GMT; expected +11.7%, December +12.1%. Loans to private sector for January at 9:00 GMT; December +11.1%.

Friday: final HICP for January at 10:00 GMT; expected -0.4% m/m, +3.2% y/y, December +0.4% m/m, +3.1% y/y. EMU economic sentiment Index for February at 10:00 GMT; expected 101.1, January 101.7; industry confidence, expected +0.4%, January 1.0%; consumer confidence, expected -12, January -12; business climate indicator, January 0.87. Unemployment Rate for January at 10:00 GMT; expected 7.1%, December 7.2%.


Tuesday: detailed GDP seasonally adjusted for the fourth quarter at 7:00 GMT; expected +0.3%, prior release (4th quarter) +0.3%. Detailed fourth quarter GDP year to year not seasonally adjusted at 7:00 GMT; prior release +1.6%. IFO business sentiment for February at 9:00 GMT; expected 102.8, January 103.4; current assessment, expected 106.9, January 107.9; business expectations, expected 99.0, January 99.0.

Wednesday: import prices for January at 7:00 GMT; expected +0.3% m/m, +4.7% y/y, December -0.1% m/m, +3.7% y/y. Export prices for January at 7:00 GMT; January 0.0% m/m, +1.3% y/y. GfK consumer confidence for March at 7:00 GMT; expected 4.4, February 4.4.

Thursday: unemployment rate for February at 8:55 GMT; expected 8.0%, January 8.1%. Final CPI for January at 7:00 GMT; expected -0.3% m/m, +2.7% y/y, December +0.5% m/m, +2.8% y/y. Final HICP for January at 7:00 GMT; expected -0.3% m/m, +3.0% y/y, December +0.7% m/m, +3.1% y/y. Total retail sales for January (release time undetermined); December 0.4% m/m, -9.1% y/y. Preliminary CPI for February (release time undetermined); expected +0.4% m/m, +2.7% y/y. Preliminary HICP for February (release time undetermined); expected +0.4% m/m, +2.9% y/y.

United Kingdom

Monday: Hometrack House Price Survey for February at 00:01 GMT; January -0.3% m/m, +2.3% y/y. Nationwide House Prices for February at 7:00 GMT; January -0.1% m/m, +4.2% y/y.

Tuesday: CBI Distributive Trades Survey (reported volume of sales) for February at 11:00 GMT; January 4.

Wednesday: fourth quarter GDP 2nd release at 9:30 GMT; 1st release +0.6% q/q, +2.95 y/y.

Thursday: Land Registry House Prices for January at 11:00 GMT; December -0.4% m/m, +6.7% y/y.

Friday: GfK Consumer Confidence for February at 10:30 GMT; January -13.


Thursday: Retail Sales for January at 23:30 GMT (prior day); December +0.25 y/y.

Friday: National Core CPI for January at 23:30 GMT (prior day); December +0.8% y/y. Central Tokyo Core CPI for February at 23:30 GMT (prior day); December +0.4% y/y. Unemployment rate for January at 23.30 GMT (prior day); December 3.8%. Household Spending for January at 23:30 GMT (prior day); December +2.2%. Housing Starts for January at 23:30 GMT (prior day); December -19.2% y/y. Construction Orders for January at 23:30 GMT (prior day); December +4.7%.


No scheduled releases

Joseph Trevisani
FX Solutions
Chief Market Analyst

[email protected]

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