FX Briefing - Rescue packages only boost euro temporarily
FX Briefing 17
packages reduce worries over financial markets
Â·Focus now on
global recession fears
Â·EMU has more
leeway to cut interest rates than USA
Rescue packages only boost euro
began the week on a firmer footing, peaking at 1.377 on Tuesday â€“ about 3 cents higher
than at the end of the previous week. On Sunday, leaders of the eurozone
countries agreed in
principle on a stabilisation plan for the financial system, and on Monday, Germany
unveiled the national details. Thanks to these rescue packages and additional
measures taken by the central banks to provide liquidity, there now seems to be
less likelihood of individual institutions collapsing and thus endangering the
financial system as a whole.
markets in particular heaved a sigh of relief, clawing back most of the
by Tuesday. However, towards the middle of the week the euphoria faded and
share prices plummeted
again because government rescue schemes cannot stop the global economic
downswing. Therefore, an impending global recession has now become the prime
concern. During the latter half of the week, EUR-USD dropped below 1.34 at
times. The euro has not been lower since June 2007, before the subprime crisis
all over the world are offering guarantees and providing capital in an attempt
the banksâ€™ confidence in each other. In Germany,
the financial market stabilisation fund
play a pivotal role: this fund will have the power to extend guarantees for new
totalling up to â‚¬400bn in return for a fee. Furthermore, it will be able to
inject between â‚¬70bn and â‚¬80bn into financial institutions, either as fresh
capital or by purchasing troubled assets. A revision of accounting rules is
being considered in order to reduce the necessity of write-downs; due to the
lack of liquidity in the markets, the present asset prices are distorted.
the government rescue package is no longer focused on buying up troubled
assets, but rather, as in Europe,
on providing guarantees and capital in return for preference shares, which, according
to the Fed, will be regarded as tier 1 capital. The nine biggest banks are
intending to accept the capital injections in return for partial nationalisation.
central banks have announced further liquidity measures. The ECB, for example, will
also accept lower-rated collateral up to a BBBâ€“ rating in its refinancing
operations. Moreover, up until March 2009, all refinancing transactions will
be in the form of fixed rate tenders where all bids will be covered. With
effect from 20
October, the Bank of England is introducing a new discount window facility
enabling banks to borrow gilts against lower-rated collateral.
money market rates fell in reaction to the rescue measures. The 3-month Euribor
declined by 20 basis points to around 5%. But confidence has not yet really
been restored in interbank trading. In the eurozone, banks are still preferring
to deposit surplus funds at the ECB: in the middle of the week, the deposit
facility was being used for a record amount of â‚¬210bn.
Federal Reserve chairman Ben Bernanke has expressed confidence that the
measures taken by central
banks and governments will stabilise the financial markets. However, he pointed
out that the
economic downswing in the US
had started long before the financial crisis escalated, and that the crisis
itself could delay recovery. The further weakening of economic activity
described in the Beige Book is clearly reflected in the September retail sales
and industrial production figures, which had fallen more sharply than expected;
the same applies to the first regional purchasing manager
indices for October.
Bernanke is expecting weak US
growth and declining commodity prices to restore price stability. Instead of
inflation worries, the Fed is now focusing on recession and financial market
risks only. Thus markets are pricing in Fed funds rate cuts, regardless of the
unscheduled internationally co-ordinated 50 basis point interest rate cut on 8
October. Rates are expected to be cut to at least 1.25% at the end of October.
However, the president of the San Francisco Fed, though skeptical about the
economy, expressed reservations on further interest rate cuts.
rate speculation is not weighing on the dollar, as there is much more leeway to
lower interest rates in the eurozone, where rates are still much higher. We are
expecting the ECB to take advantage of this, because the economic risks identified
beforehand have now materialised and the
risk of inflation is diminishing.
week there are only a few US
indicators on the agenda. Leading indicators and existing home sales could have
stabilised somewhat in September after their sharp declines. In contrast,
October sentiment indicators in the eurozone will be pointing downwards again.
Partly for this reason, risk aversion is unlikely to wane in the markets, and
thus the euro is unlikely to strengthen against the dollar.
Meister +49 69 718-2600
Grabbe / Klaus NÃ¤fken
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