government sees possibility of bailing out EMU/EU states
Yen: safe haven status in jeopardy
the course of the week, the dollar strengthened against the major currencies.
Versus the euro, the US
currency climbed to just over 1.25 temporarily, and was around 1.26 at the end of
the week. The dollar rose even more sharply against most eastern European
currencies. The zloty, the rouble and the forint remained particularly under
pressure. Contrary to the usual pattern, the yen did not benefit from the
dollarâ€™s strength, quite the opposite in fact: compared to the previous week,
USD-JPY rose by around 2.5 yen to over 94.
firmer dollar is primarily a sign of heightened risk aversion. According to the
New York Fed and Philadelphia Fed survey results, economic activity in the
manufacturing sector has plummeted again in February. Expectations appear to be
stabilising somewhat, presumably under the impact of the economic stimulus
package, which has now been passed, but equity prices are still tumbling.
Apparently, there are still only limited hopes of the stimulus measures having
a lasting effect on the economy.
there is not much in the dollarâ€™s favour, but the alternatives do not look
better at the moment. In addition to weak economic data, the extremely tight
budget situation in some of the eurozone member states and widening credit spreads
are weighing on the euro. Moreover, there is growing concern in the markets
that the escalation of the situation in eastern Europe could also affect the
euro areaâ€™s economy. Apart from the close economic ties, eurozone banks, as important
market players in eastern and southeastern European countries, could face
considerable credit risks.
euro was temporarily supported by German finance minister Peer SteinbrÃ¼ckâ€™s
remark that, although eurozone legislation made no provision for bailing out
member states, eurozone countries would presumably pull together if one of them
got into a difficult situation. After a meeting with European Commission
president Jose Manual Barroso, German Chancellor Angela Merkel stated that the
German government was prepared to help EU countries, if that should prove
necessary. At the moment, however, neither the German government nor the
Commission saw any necessity for immediate action.
European economic indicators painted a gloomy picture. Although the ZEW
economic sentiment improved markedly in February, the purchasing manager
indices, which in our view are more significant, and the French business survey
results moved either sideways or down. On the whole, however, the results for Germany
seem to have been slightly better than the EMU average. This suggests that the
ifo business climate index, which is being published next Tuesday, will
probably have remained more or less stable.
the past few months, the yen had tended to benefit from signs that the crisis
was escalating. This was mainly due to the assumption that the more shaky the
global economy becomes, the greater the repatriation of Japanâ€™s
extensive foreign investments will be. This argument is still basically valid.
However, we think it feasible that fundamental Japanese factors will start
having a greater impact on exchange rate developments again; the close
correlation between EUR-JPY and USD-JPY, for example, will then become less
yenâ€™s sharp drop this week was partly due to the Japanese Q4 GDP data. They
show a drastic collapse in economic activity of 3.3% quarter-on-quarter and
4.7% year-on-year. The fact that Japan
is very export-oriented had supported growth in the past years, but is now
becoming its downfall: in Q4, exports plummeted by almost 14%
quarter-on-quarter. Furthermore, the collapse looks set to continue: some estimates,
which should be taken seriously, are expecting a decline on the same scale in
the current quarter.
addition to this, the Japanese government has got its problems: finance
minister Shoichi Nakagawaâ€™s resignation after embarrassing behaviour at a press
conference at the G7 summit is symptomatic of this. Against this backdrop, the
CDS spreads for Japanese government bonds have more than doubled to over 100
basis points in the last few days.
the extremely weak economic situation, we expect the yen to remain soft for a
while. January trade balance data due to be published in the middle of next
week, will probably have deteriorated again. If the ifo index stabilises,
EURUSD could be given a temporary boost; other data due to be released later in
the week, will probably cap any EUR-USD advances, however. In the run-up to the
ECB governing council meeting on 5 March, at which the downward revisions to
the projections will be announced, and the refi rate will presumably be cut by
at least 50 bp, we see little scope for the euro to recover.
Rieke +49 69 718-4114
Grabbe / Klaus NÃ¤fken
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