Â·SNB wants to
prevent appreciation of franc, confirms willingness to intervene
Â·FOMC will try to
dampen interest rate hike expectations
US dollar: changing patterns
In the course of the last two weeks, the US currency has firmed somewhat. EUR-USD was still
around 1.42 in the first week in June. After having fallen
below 1.38 for a time, the euro is now back at around 1.39 again. Like the
euro, most major currencies lost ground against the dollar, particularly the
Swedish krona, the zloty and the Canadian dollar. USD-JPY climbed over 98
temporarily,but relinquished its gains at the beginning of the week. It is
currently around 96, as it was in the first week in June.
At its bi-annual media conference, the Swiss National
Bank confirmed that it would maintain its very expansive monetary policy stance
and that it was willing to prevent the appreciation of the Swiss franc against
the euro. However, the remark that there was no clearly defined intervention level
seems to have prompted the markets to test EUR-CHF below the 1.50 level.
Reportedly, this led to intervention later that day in support of the euro. At
any rate, it recovered to around 1.51 again towards the end of the week. The
Canadian central bank has also intervened during the last few days â€“ albeit
only verbally â€“ to prevent the Canadian dollar from strengthening. Moreover,
the BoC governor confirmed thebankâ€™s intention to keep interest rates at 0.25% until
the middle of 2010, and even hinted at the possibility of additional quantitative
USD: Between interest rate rise
expectations and crisis fears
Market reactions in the forex market are not following
a set pattern at the moment. On the release of the US labour market report for May, which indicated that
the pace of job losses was slowing significantly, the US currency firmed. This is a sign that things are
getting back to normal: the slight improvement in the labour market figures
fuelled speculation that the Fed could start to raise interest rates sooner
than expected â€“ possibly even as early as 2009. The yield on 2- year T-notes
shot up from below 1.00% to over 1.30%, even rising over 1.40% for a short
time. Furthermore, the interest rate disadvantage to equivalent euro papers
narrowed by about 25 points, which would normally serve to strengthen the
At the beginning of this week, however, economic optimism
began to wane. After having
risen the previous two months, the New York Empire
Manufacturing Index dropped from â€“4.5 to â€“9.4 in June; US industrial production
fell again in May, by 1.1%, and is thus heading for a contraction of 3% or more
in the current quarter; moreover, weak housing starts and building permits show
that residential construction, unlike existing homes transactions, has not yet
bottomed out. In this environment, equity markets, which had not gone up since
the beginning of June as it is, began to tumble. The bond markets regained lost
ground. And how did the dollar react? The greenback continued to strengthen.
The movement here was clearly following the â€śsafe havenâ€ť pattern again: when
the crisis seems to be escalating, market participants become risk-averse and flock
into the dollar.
The anxious mood lifted somewhat after it was reported
on Thursday that the Philly Fed Index had surged to just below zero (â€“2.2 from â€“22.6).
Some market participants also saw the decline in continuing claims as a good
sign, even though it is not clear whether it signified an increase in employment
or merely that less people had a right to claim unemployment benefit.
Uncertainty is still rife, however; within the space
of a few days, the markets alternate between
diametrically opposed scenarios. The Federal Open
Market Committeeâ€™s regular meeting is
scheduled for next Wednesday. There are not expected
to be any announcements on monetary
policy measures. The Fed will leave interest rates on
hold and continue with its quantitative measures. Markets will be focusing more
on the statement, particularly with regard to the longer-term interest rate
outlook. We are expecting the Fed to confirm the signs that the economic
downturn is slowing and to state that things are also improving in financial
markets. However, the emphasis will probably be on allaying fears of inflation rising
and interest rates being raised accordingly in the near future, in particular
by pointing out the extremely low level of capacity utilisation. The gist of
the last statement is likely to be reiterated, i.e. that given the economic
situation, exceptionally low interest rates are justified for some time to
It is very hard to predict how forex market players will
react to this message. In normal circumstances, a downward correction of
interest rate expectations would have a negative impact on the dollar. The
reaction will largely depend on whether a mood of economic scepticism or
optimism predominates in the markets.
The US economic indicators at the beginning next week are
not likely to shed much light on the way things are going. Durable goods orders
will probably have declined in May, whereas home sales are expected to have
increased, partly as a result of tax incentives. In Europe,
the monthly series of sentiment indicators will be published, including the ifo
business climate index for June, French and Italian national business climate
indices, and the preliminary purchasing manager indices. They will probably have
improved, but are not likely to raise any great hopes of an upswing.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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