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Friday September 25, 2009 - 16:23:20 GMT
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FX Briefing

FX Briefing 25 September 2009


·        FOMC to maintain stimulus for some time yet

·        Fed prolongs purchasing programmes, reduces certain quantitative measures further

·        USA puts correcting global imbalances on G20 agenda

·        China emphasises importance of a stable yuan

·        BoE Governor Mervyn King finds depreciation of sterling “helpful”


Global imbalances are back on the agenda

The US dollar was weak for the most part in the first half of the week, but regained some ground after the Fed Open Market Committee meeting. The movement was triggered primarily by favourable equity markets and expectations that the Fed would confirm its expansive monetary policy stance. On Wednesday evening, after the release of the FOMC statement, the US equity market hit a new one-year high. So did EUR-USD, which rose to 1.4844. USD-JPY dropped below 91.


The euphoria was only short-lived, however. By the end of trading on Wednesday, US equities

had fallen sharply again, and the dollar had strengthened. The dollar’s recovery came to a

temporary halt when Asian and European equity markets stabilised. In US trading on Thursday, share prices plummeted again. EUR-USD fell to around 1.47. Towards the end of the week, USDJPY weakened to around 90, after Japan’s finance minister Fujii reiterated his opposition to intervention in Pittsburgh.


Although the FOMC meeting appears to have been the turning point, it offered no real surprises. As expected, the central bank reiterated its intention to maintain its expansive monetary policy for an extended period. Although the Committee sees tentative signs of economic recovery, it warns of negative factors: high unemployment, sluggish income growth, wealth losses and credit constraints. These are likely to dampen economic activity for quite some time.


However, the US central bank also appears to be preparing a cautious exit from quantitative easing. In the latest statement, the Fed no longer promises to employ “all available tools” to promote economic recovery, but now uses the term “a wide range of tools”. This is also in line with the decision not to complete the purchase of $1.25 trillion of agency MBS and $200 billion of agency bonds by the end of this year, but by the end of the first quarter of 2010 instead. On Thursday, the Fed also announced that the Term Auction Facility (TAF) and the Term Securities Lending Facility (TSFL) would be reduced. Furthermore, there are rumours that the Fed is discussing reverse repurchase agreements with market participants.


Speculation about the possibility of the Fed tightening monetary policy sooner than expected cannot, however, be the sole reason for the firmer dollar and weaker equity market. This argument would not tally with the latest developments on the interest rate front. In the latter half of the week, yields on 2-year Treasuries have fallen from about 1.0 to 0.94%, and Fed Funds Futures for the middle of next year have reached new highs.


Against this backdrop, the stabilisation of the dollar should rather be interpreted as consolidation. Uncertainty about the further potential of equity markets probably played a part: on the one hand, in view of the impending third quarter reporting season, and on the other, the growth expectations for industrialised countries being only modest in the medium term.


While this FX Briefing was being written, the G20 summit was in full swing. Reports and results are not expected until Friday night. In our view, the US are trying to push the topic “correcting global imbalances” into the foreground. This is mainly about the high deficit in the US and the corresponding surpluses in Asia, particular China, the Middle East and – mentioned occasionally – Germany. The current account imbalances are seen as reflecting either (too) strong or (too) weak domestic demand. In calling for global imbalances to be corrected, the US are primarily interested in promoting their own exports. Foreign demand should make up for weaker domestic demand in the US. This is inevitably linked with the exchange rate situation, as domestic and foreign demand are dictated by exchange rates.


In addition: the UK is apparently discovering the appeal of the depreciation of sterling too. In a press interview, Mervyn King, governor of the Bank of England, commented that the decline of

the pound was “helpful” in rebalancing Britain’s economy. “A shift of resources into net exports” was what was now needed. These remarks were probably the main reason for sterling’s renewed weakness. After the interview was published, EUR-GBP rose to almost 0.92.


Against a background of the US calling for discussions on correcting global imbalances, China

has wasted no time in putting forward its point of view. The president, Hu Jintao, stated that a stable yuan had been instrumental in stabilizing economic activity in the Far East. And addressing exporters, central bank president Zhou Xiachuan emphasised the importance of a stable yuan. But the German government is also being rather thin skinned. German Chancellor Angela Merkel, who is standing for re-election this weekend, warned against diverting the G20 agenda away from financial market regulation to other “substitute” topics.

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


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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