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Friday February 20, 2009 - 15:55:40 GMT
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FX Briefing - Yen: safe haven status in jeopardy

FX Briefing 20 February 2009


·        Growth collapse in Japan triggers yen concerns

·        German government sees possibility of bailing out EMU/EU states


Yen: safe haven status in jeopardy

During 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 dollar’s strength, quite the opposite in fact: compared to the previous week, USD-JPY rose by around 2.5 yen to over 94.


The 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.


Fundamentally, there is not much in the dollar’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 area’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.


The euro was temporarily supported by German finance minister Peer Steinbrück’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.


The 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.


In 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 Japan’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 pronounced.


The yen’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.


In addition to this, the Japanese government has got its problems: finance minister Shoichi Nakagawa’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.


Given 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.


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.

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



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