interest rate cut in March, keeps all options open
pushes rouble to the tolerance limit; central bank set to cut lending
scope for yen to depreciate despite drastic fall in GDP
Euro remains under pressure
forex markets have continued to follow the familiar pattern: on signs that the
crisis is escalating, the yen firms against the dollar, and at the same time,
the dollar strengthens against the euro, and vice versa. Towards the middle of
the week, EUR-USD rose to over 1.30. This was presumably due to firmer equity
markets because of some positive news from the corporate sector, and possibly
also because of the BoJâ€™s announcement that it was earmarking 1 trillion yen to
purchase corporate shares. In the US,
pending home sales rebounded, which probably also contributed to the favourable
the course of the week, however, the euro gave up its gains again: due to the
ECB governing council meeting, weaker US
economic indicators and concern about the US
labour market figures, the euro fell to around 1.28. Speculation against the
Russian rouble could have weighed on the euro too.
ECB Council is keeping its options
had been announced in January, the ECB governing council left interest rates
unchanged at 2% at its meeting on Thursday. However, it signaled quite plainly
that an interest rate cut was likely in March, when the new staff
projections were available. By referring to the current market expectations,
ECB president Jean-Claude Trichet hinted at the press conference that rates
would probably be cut by 50 basis points.
what is perhaps even more significant, in our view, is that, in its statements
on further monetary policy action, the ECB council is keeping all its options
open â€“ from zero interest rate policy to quantitative easing measures. It has
not said anything concrete, but it is no longer ruling anything out either. If
the economic situation continues to deteriorate, the ECB can thus be pragmatic.
ECB council itself is expecting an â€śextended period of significant economic
to â€śvery negativeâ€ť GDP growth in the fourth quarter. Thus the ECB seems to be
approaching our estimate. We are expecting GDP to have fallen by 1.5%
quarter-on-quarter in the eurozone in Q4, and by 1.8% in Germany.
The European growth data will be published this coming Friday and could put
pressure on the euro next week.
at least mid-December, the Russian rouble has been under significant pressure
to depreciate. The central bank is trying to stabilise the roubleâ€™s exchange
rate against a currency basket of US dollar (55%) and euro (45%). On 22
January, the central bank announced that it would stop the rouble from
depreciating beyond 41 against this basket. The markets immediately started
pushing the rouble to that limit. The rating agency Fitch helped a bit too by
rating by one notch to BBB on Wednesday. For the last few days, the rouble
basket has been just under 41. The central bank, which has lost about 1/3 of its
$600bn reserves in the last 6 months, is probably intervening massively at the
Russian central bank is in a dilemma: on the one hand, the economy and the
financial sector are
in a difficult situation, because as a result of the international financial
crisis and the plunge in commodity prices, foreign capital inflows have plummeted.
Accordingly, the Russian central bank is trying to stabilise the financial
sector with generous supplies of liquidity and keep corporate lending going. On
the other hand, the central bank is thus nurturing speculation against its own currency:
the banks are said to be using a large proportion of the central bank loans to
speculate against the rouble â€“ which apparently appears more lucrative to them
at the moment than lending to Russian companies.
the extensive speculation, the Russian currency reserves are melting away
bank is not likely to just sit back and watch this happening. It could either
give up the
peg to the currency basket, in which case the rouble would probably depreciate
significantly, or it could stop the speculation by means of monetary policy and
administrative measures. A return to capital transaction controls is unlikely
for political reasons. It is more likely that central bank lending will be
drastically reduced, possibly in combination with increasing interest
rates. At the moment, Moscow
appears to be leaning more in this direction. We are therefore inclined to
think that it will be possible to uphold the 41 mark for the time being.
USD-JPY: limited upward potential
the course of the week, USD-JPY firmed somewhat from just under 90 to over 91.
Remarkably, the yenâ€™s strength is in complete contrast to the fundamental state
of the Japanese economy.
Here Q4 is set to be the third negative quarter in a row. The GDP data, due to
be published on 16 February, will probably show that macroeconomic performance
contracted by around 3% quarter-on-quarter.
national trade association sees exchange rate developments as being responsible
for this to a large
extent, as export revenues are falling a good deal faster than export volumes.
It is demanding that the yen should be stopped from appreciating further. There
are rumours that the Japanese government is considering intervening.
a technical point of view, there are plenty of potential ways of weakening the
yen: intervening against oneâ€™s own currency is not a problem. However,
politically, there is only limited scopefor doing so: on the one hand, it must
be borne in mind, that by most standards, the yen is not overvalued; its
development over the past months is rather a correction of its having been
significantly undervalued in the past years. Thus the Japanese government will
probably find it difficult to get international support. This applies particularly
to the US,
where the new government has already adopted a position against the valuation
of the yuan, and where, in view of the crisis, protectionist tendencies appear
to be increasing. Furthermore, it must be assumed that Japanese investors and
companies will take advantage of the yenâ€™s weak phases to unwind foreign investments
(carry trades) or repatriate foreign revenues.
a background of dire growth data we are expecting USD-JPY to recover somewhat;
the risk of intervention is likely to support this trend. On the whole,
however, we only see limited upward potential.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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