FX Briefing - Yen and dollar rise on growth scepticism
FX Briefing 10
are nervous in the run-up to quarterly earnings reports
orders and production in Germany pick up significantly in May
Â·China keeps the debate on international currency system
Yen and dollar rise on growth scepticism
The release of US labour market data for the beginning
of July triggered a change of mood in
the markets. Market participants are beginning to wonder
whether the â€śgreen shootsâ€ť of the last weeks and months will be able to survive
in the harsh economic climate. One factor causing uncertainty in the equity
markets is the imminent release of the quarterly earnings. Stock and commodity markets
were for the most part under pressure this week. The markets remained
sceptical, despite some favourable economic news, such as the improvement in
the US ISM nonmanufacturing index, significant increases in industrial new
orders and industrial production in Germany in May and an upwards revision of
the IMFâ€™s growth projections.
The dollar and the yen in particular benefited from
investorsâ€™ rising risk aversion. USD-JPY slipped below 92 for a short time,
which is a decline of over 4% compared to the end of last week. The appreciation was sufficient to prompt Japanese
government representatives to announce that they were keeping a close watch on
the development of the yen. Towards the weekend, USD-JPY recovered slightly to
just under 93. Some of the â€ścommodity currenciesâ€ť, including the Mexican peso,
the rand, the real and also the Australian dollar, suffered the sharpest
losses. EUR-USD ended the week at around 1.39. The euro came under additional
pressure on Friday due to an article in the Handelsblatt stating that at
least 10 eastern European countries were currently in credit negotiations with
the International Monetary Fund. These include Bosnia (whose request has already been granted), Serbia, Croatia, Macedonia, as well as Ukraine and Belarus, but also the EU countries Bulgaria, Romania, Latvia (again), and, possibly, Hungary.
This weekâ€™s European economic data were a pleasant
surprise. Manufacturing orders in Germany rose by 4.4% in May month-on month;
the increase was broadly based; it covered all sectors, and more orders came
both from Germany and from outside the eurozone. However, the recovery was
strongest in the automobile sector, which is heavily subsidised in several
countries. Industrial production rose by 3.7% in May, the manufacturing sector
posted an even bigger increase.
The output drop in the second quarter was thus only
around 1% quarter-on-quarter. Depending of course on how things developed in
June, there is therefore a slight chance that real GDP might not have declined
further in the second quarter. This notion is supported by the foreign trade
figures, which suggest that net exports could have been slightly positive.
One should not get too euphoric, however: on the one
hand, it should be borne in mind that the level was extremely low to start
with. In fact, industrial production in May was still a good 18% lower than the
previous year. Furthermore, the ifo index assessment of the business situation in June fell to its lowest level since reunification. A
significant majority of companies polled saw the downward trend continuing. The
improvement in net exports should also be treated with caution: it has come
about primarily as a result of a large drop in real imports â€“ which does not suggest
an early economic recovery.
The participants in the G8, or G20 summit in the Italian
city of Lâ€™Aquila tried for a time to skirt around the subject of
currencies. The G8 and the â€śBig 5â€ť emerging markets merely announced that they
would refrain from competitive devaluation. However, it is hard to avoid the
issue of the dollarâ€™s status as the major reserve currency: in his address to
the participants of the summit, the Chinese Vice Minister Dai Bingguo, who was representing
President Hu Jintao, explicitly demanded a â€śbetter system for reserve currency issuance
and regulationâ€ť. Surprisingly, President Nicolas Sarkozy was also in favour of
a reform debate.
In actual fact, there is no real alternative for emerging
markets with high currency reserves in the short to medium term. Monetary
authorities can diversify their reserves to a greater extent, but are
ultimately dependent on the big, liquid currencies. From a creditworthiness and
liquidity point of view, it is difficult to include emerging market currencies.
The fact that China, the biggest advocate of reforms, has virtually
pegged its currency to the dollar, makes the situation rather odd, however. The
CNY is not even fully convertible, and thus not suitable for international use. It appears that China is using the discussion primarily as a lever for its
claims for more influence in connection with the restructuring of the IMF. An
institutional solution for an international currency system, which is no longer
(predominantly) built around the dollar, is a very difficult and long-term
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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