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Friday April 17, 2009 - 15:21:49 GMT
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FX Briefing - US economy: velocity of fall diminishing

FX Briefing 17 April 2009


·        US manufacturing sector plunge seems to be slowing down

·        US residential construction is creeping sideways – at rock bottom

·        IMF warns of long recession and slow recovery


US economy: velocity of fall diminishing

Over the last few weeks, the euro has weakened somewhat in relation to most major currencies. EUR-USD is currently around 1.31, a good 2 per cent lower than a fortnight ago. Similarly, EURJPY has fallen to about 130. USD-JPY has remained virtually unchanged at just under 100.


However, contrary to what one might have expected, given the experiences of the last few

months, equity markets actually brightened up a bit. This was because earnings reports, particularly from the banking sector, turned out to be remarkably positive on the whole. Furthermore, numerous US politicians, from President Barack Obama and his advisor Lawrence Summers to Fed chairman Ben Bernanke tried to raise confidence. They all saw the first signs of stabilization in the US.


We should not get our hopes up too high, however. About all that can be deduced from the

data, is that the velocity of the fall could be diminishing. Industrial production fell to its lowest

level in 10 years in March; the decline in the first quarter was 5.4% quarter-on-quarter – much steeper than in Q4. In the last quarter, the ISM index rose modestly, but its current level of 36.3 (the neutral level is 50) is still signalling an ongoing sharp contraction. The regional surveys of the Federal Reserve Banks of New York and Philadelphia, which were published this week, went up slightly more in April, but these indicators too are continuing to show contraction in the manufacturing sector.


After increasing the previous month, the number of housing starts and building permits dropped in March, almost reaching January’s record low. With a bit of good will, this could be interpreted as “bottoming out”. But building activity is still at a catastrophically low level. At about 500,000, the number of housing starts was only a third of the average for the last 50 years; nominal (!) expenditure is currently at the same level as at the beginning of 1998. The situation is not likely to change much in the foreseeable future either. The massive supply overhang both for new and existing homes is making it less attractive to build new ones. And rising unemployment will probably also play a part in keeping the supply of houses up and demand down.


In the first quarter as a whole, private consumption seems to have remained relatively stable; it

is possible that the increase in unemployment was initially balanced out by the purchasing power effect of lower energy prices. However, after having risen in the two previous months, retail sales fell again quite significantly by 1.1% in March. People are putting larger purchases of durable consumer goods on hold.


The International Monetary Fund published two chapters of the new World Economic Outlook in advance this week containing an interesting analysis on how long the global recession could

last and what the upswing could look like. The IMF economists come to the conclusion that there is little possibility of a V-shaped recovery.


This is because, unlike in earlier recessions, no impetus can be expected from US domestic demand; in the recession at the beginning of the 1980s, for example, there was considerable pentup demand for property and durable consumer goods due to the high interest rate policy. When interest rates began to fall, people started spending, thus triggering a powerful spurt of growth. Things are quite different this time: consumers are deeply in debt (the monetary fund describes the situation as “overleveraged”), and their first priority will be to reduce their debts. They will therefore probably hold back on spending.


Another factor which is different from earlier recessions is the global dimension of the downswing. As a result, there is not much scope for countries to generate a recovery by means of exports. Therefore, the International Monetary Fund is expecting the recession to be long and the recovery to be sluggish.


We share the IMF’s view. The job losses, credit defaults and insolvencies all pose significant

economic risks in our opinion. The fact that the downswing has slowed down is currently being hailed as a positive sign, but it could drag on for several quarters and cause great damage. At present, capacity utilization is so low that “stabilizing tendencies” are no longer enough to sustain companies and jobs.


In this environment, it is hard to make exchange rate predictions. In the short term, we are expecting the dollar to strengthen, primarily due to safe haven considerations and hopes of the more aggressive US economic policy succeeding (and vice versa, a critical assessment of the economic policy measures in the eurozone). In the longer term, however, we see a danger of the US discovering the dollar exchange rate as an additional policy instrument. A depreciation of the dollar could be justified from an economical point of view by the balance of payment situation, but it would exacerbate the problem, particularly in Europe.


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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