highs on recovery hopes, bond yields pick up
the international role of the dollar
member Mersch sees inflation expectations â€śedging up slightlyâ€ť
pause in asset purchases, Sterling rebounds
1.50 mark within reach
The dollar is continuing to tumble. This week too the US currency fell markedly against most major currencies.
On Thursday morning, EUR-USD hit a new annual high of 1.4967, and was still around
1.49 towards the end of the week. The 1.50 mark is within reach.
Once again the dollar movement was fuelled by equity
markets, which had soared to new highs
on the release of the first quarterly earnings, as well
as some improved economic data from the
US. Retail sales had in fact dropped by 1.5% because
of car sales falling back again after the
cash-for-clunkers programme ended. But the drop was
smaller than expected, and, excluding
cars and fuels, sales were up slightly. This confirms the
estimate that private consumption in the US probably made a strong contribution to growth in Q3.
Even more surprising was the fact that the Empire State
Manufacturing Index had soared from
18.9 to 34.6 in October, the highest level since spring
2004. Furthermore, for the first time, the
employment component is showing an increase in
employment again. However, the EmpireState Index is only regional and relatively volatile. The Philadelphia
Fed Index, for instance, fell slightly after having increased in the previous
months. But it too is still well over the expansion threshold and shows
improvement in some important components.
It is somewhat schizophrenic when marketsâ€™ confidence
in the US economy is growing and US equities are soaring from
one high to the next, that the dollar, the same countryâ€™s currency, is on a losing
streak. But there is still much discussion as to whether the US currency could lose its special status as global
reserve currency. Some are complaining that rising public debt in the US is undermining foreign investorsâ€™ confidence in the dollar.
Others are referring to shifts in the global structure of economic power in
favour of emerging markets. Thus a report published by a British bank this week
attracted a good deal of attention: it stated that only just over a third of
inflows of global reserves went into dollars in the last three months.
In Europe, the bond markets, which had been very firm for many
weeks despite the signs of
economic recovery and rising share prices, have been under
heavy pressure in the last few days. Since the ECB governing council meeting,
10- year Bund yields have risen from 3.12% to 3.30%. There is movement at the short end of the curve
too. 2-year Bund yields have gone up almost 20 points to 1.41%. After the ECB
meeting, the rates had risen slightly at first, until ECB governing council member Yves Mersch remarked that
inflation expectations were edging up. This triggered a substantial interest rate hike, which
also had an impact on the exchange rate against the dollar.
The yen and the pound are deviating somewhat from the
general trend. Whereas the yen had
appreciated during the last few weeks in the wake of
dollar weakness, the pound had tended to be even weaker than the dollar. Now
there has been a turnaround: cable has risen by around 2% to 1.63, while USD-JPY has increased by over 2.5% to
above 91. The fact that this movement occurred simultaneously in both
currencies suggests the extensive closing of GBP-JPY short positions.
This was probably triggered by Paul Fisher, the deputy
governor of the Bank of England responsible for markets and a member of the
MPC. He stated that the BoE would probably pause in its asset purchase
programme and not complete it. The asset purchase programme has almost been used
up: ÂŁ162 bn of ÂŁ175 bn have already been spent. At the current pace and size of
the tenders, the funds will be used up in about three weeks â€“ i.e. around the
time of the next MPC meeting on 5 November.
Mr Fisherâ€™s remarks suggest that the BoE has no plans
to stock up the funds at the moment, but wants to highlight the possibility of continuing its asset
purchase programme should this become necessary. Up to now, markets had been
speculating on the BoE extending quantitative easing once again in November.
Mr Fisher was clearly making a tentative attempt to
correct the Bank of Englandâ€™s seemingly dovish stance. With regard to the next
Inflation Report due to be published on 11 November, he said that the
conditions for a turn in the economy were all there. Third quarter growth would
probably turn out to be flattish; however, towards the
middle of next year, growth rates could be around the long-term trend again â€“ albeit fluctuating considerably
in certain quarters. In reply to a question about the weakness of the pound, Mr Fisher
said that the BoE was not trying to talk exchange rates up or down: comments made by the bank
were generally backward looking.
Stephan Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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
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