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Friday May 15, 2009 - 15:40:28 GMT
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FX Briefing- Euro rally stopped by growth fears

FX Briefing 15 May 2009

Highlights

·        Euro area GDP plummets in the first quarter

·        Chinese exports indicate ongoing weakness in world trade

·        Q1 GDP data makes further downward revisions to growth forecasts necessary

 

Euro rally stopped by growth fears

This week, stock markets once again proved to be a reliable risk barometer. At the beginning of the week, risk appetite was still high, but this changed in the second half of the week when stock prices turned, showing that market participants had become more cautious again. Accordingly, higher yielding currencies were sold, and financing currencies benefited: The yen rose not only against the dollar but also against most other currencies. EUR-USD dropped from a peak of 1.3722 in the middle of the week (close to its 3- month high) to 1.3550, and most emerging market currencies also suffered losses.

 

Risk aversion rose again because after a number of favourable results, several economic indicators came in worse than expected. This started on Tuesday with Chinese export figures – the first to be released for April. After the relatively favourable results in March, markets had expected the drop to be less pronounced again in April, indicating a stabilization in world trade. But then the figures showed that total Chinese exports had fallen faster again – by almost 23 % year-on-year.

 

This does not bode well for the April figures of other major export countries. Therefore, foreign demand could remain a drag on growth in the second quarter. The figures for German steel production are pointing in the same direction: Output fell to fresh record lows in April. This dampened rising hopes of a recovery which had been supporting stock markets for weeks.

 

Moreover, production figures in the other major European countries were much worse than in Germany. As a result, total production in the eurozone was lower than market participants had expected. So it looks as though the second quarter is off to a bad start, which means that GDP will very probably shrink further.

 

First quarter GDP figures for the EMU have confirmed the expected decline in the first quarter. Germany was hit particularly hard with –3.8 % qoq. Even if the German economy stagnated in the remaining three quarters, the minus for 2009 would be close to 6 %. Bundesbank president Axel Weber is not expecting GDP growth rates to turn positive this year. We are forecasting a further decline.

 

In the euro area, the extent of the decline in GDP was less pronounced, but even so the drop in the first quarter would mean a minus of almost 4% for the entire year if GDP was to stagnate from now on. In the latest ECB Monthly Bulletin, the professional forecasters have assumed a decline of 3.4% for the euro area in 2009, but given the result for the first quarter, this appears too “optimistic”. Therefore, the ECB forecasts will probably have to be revised down further. On the bond markets this led to a lot of speculation in the past few days that interest rates would fall, which helped to weaken the euro in the second half of the week.

 

The US figures on the other hand were mixed. Given the trade and inventory data, first quarter growth looks set for a significant upward revision. However, retail sales were on the weak side and initial jobless claims indicated an ongoing deterioration in the jobs market.

 

Next week, markets are going to focus on the sentiment indicators for May: Will the upward trend of the past two months have continued? If it has not, growth fears will increase again. In this case, EUR-USD is likely to trade at the lower end of the 1.37 to 1.29 range that has been intact since the middle of March.

Uwe Angenendt +49 69 718-3648

 

Economics Department

+49 69 718-3642

volkswirtschaft@bhf-bank.com

Foreign Exchange Trading

devisenhandel@bhf-bank.com

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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