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Friday January 9, 2009 - 15:01:58 GMT
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FX Briefing - Icy economic climate

FX Briefing 9 January 2009


·        Pound recovers after December sell-out

·        US fiscal package only gives a temporary boost

·        EMU economic data indicate record decrease in GDP


Icy economic climate

In thin trading in the last two weeks of 2008, EUR-USD was relatively unspectacular at around 1.40. However, in the first full trading week of the new year, the market started gathering steam again: the pound was this week’s winner; it rose significantly against the dollar and the euro. GBP-USD gained over 5% to 1.53, EUR-GBP fell more than 6% to about 0.90. The sharp movement appears to have been due to sizeable short positions in pounds, which had been built up during December, being closed prior to the BoE’s interest rate decision. Some economic indicators, such as retail sales, had not been quite as bad as expected, which is also likely to have played a part. Furthermore, it was uncertain how big the central bank’s rate cut would be. And in fact the bank rate was “only” cut by 50 basis points to 1.50%.


There was some movement in EUR-USD too. By Tuesday afternoon, the euro had dropped by around 6 cents to just over 1.33. The momentum in the dollar’s favour was triggered by equity markets, where risk appetite appeared to have increased somewhat at the start of the new year. First and foremost, the new US economic stimulus package gave rise to some premature optimism. Barack Obama, who will be inaugurated as US president on 20 January, and the new Congress, which now has a Democratic majority, are working full steam ahead on a massive stimulus package. It is reported that this package, which is to be passed by mid-February, will be in the region of $775bn, i.e. about 5% of GDP, and run for two years. Compared to that, the German government’s new €50bn stimulus plan looks relatively modest.


In the second half of the week, however, the mood became more subdued again. Equity markets

fell back, and the dollar weakened. Towards the end of the week, EUR-USD was around 1.37. Markets were brought back down to earth by the economic data coming in: the ADP indicator showed a record loss in December of almost 700,000 jobs in the US private sector. In the eurozone, the economic data published were disastrous: in November, German exports slumped by over 10% month-on-month, and industrial new orders in the manufacturing sector plunged by

6% as in October. German industrial production fell by 3.1% in November. If production remains unchanged in December – and this is by no means certain – there would be a quarter-on-quarter decline of 5.0% in Q4. in France, things look even worse: there, the quarter-on-quarter decline in Q4 would be 5.8%.


Thus the worst fears for the fourth quarter seem to be coming true. The current figures indicate

that there could be a quarter-on-quarter drop of up to 2% in German GDP in Q4. Things do not look much better for the eurozone as a whole either. What is particularly scary, however, is that the trend throughout the whole of Europe is still pointing downwards. The EU Commission’s survey results, for instance, deteriorated sharply again in December. The economic sentiment indicator plummeted from 74.9 to 67.1. That is the lowest level by far since 1985 when these figures started being recorded.


In December, the ECB governing council had emphasized that the interest rate decision in

January was “open”. After the meeting, some council members had even signalled that they would prefer to leave interest rates unchanged in January. However, the latest data are so bad, that we now think a 50 bp interest rate cut is the most likely option next Thursday. Even Bundesbank president Axel Weber, one of the hawks, admitted in a recent speech that some of the downside risks listed in the December projections of the Bundesbank and the Eurosystem, had already become evident, and that the last quarter of 2008 was likely to turn out worse than previously expected. The economy was not likely to pick up again until 2010.


It is still not clear, however, what course of action the ECB will take on Thursday. If interest

rates are cut, the ECB will probably try to diminish further interest rate cut expectations, as it did in December. If, on the other hand, the central bank leaves interest rates unchanged, it will at least have to acknowledge additional growth risks and thus indicate its willingness to cut rates.


There will therefore be no clear signals for the markets. But, regardless of how the ECB acts on

Thursday, economic developments will in the end force monetary policy to reduce interest rates further. The interest rate cycle in the eurozone still has a long way to go before reaching its trough.


Stephan Rieke +49 69 718-4114

Economics Department

+49 69 718-3642

[email protected]

Foreign Exchange Trading

[email protected]

Jörg Isselmann

+49 69 718-2695

Matthias Grabbe / Klaus Näfken

+49 69 718-2688


<i>This report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and its affiliated companies (together "BHF-BANK Group") solely for the information of its clients. The information and opinions in this document are based on sources believed to be reliable and acting in good faith, but no representation or warranty, express or implied, is made by any member of the BHF-BANK Group as to their accuracy, completeness or correctness. Opinions and recommendations are given in good faith but without legal responsibility and are subject to change without notice. The information does not constitute advice or personal recommendation, for which the duty of suitability would be owed, but may facilitate your own investment decision. Moreover, you should seek your own advice as to the suitability of an investment matter mentioned herein. Investors are reminded that the price of securities and the income from them can go down as well as up and that the past performance of an investment or a market is not necessarily indicative for future results. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete, and this document is not, and should not be construed as, an offer to sell or solicitation of any offer to buy the securities mentioned in it. BHF-BANK Group and its officers and employees may have a long or short position or engage in transactions in any of the securities mentioned in this document, or in any related securities. This publication must not be distributed in the United States.

© 2007 BHF-BANK Aktiengesellschaft

All rights reserved. Please mention source when quoting from it.



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