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Friday October 23, 2009 - 14:54:38 GMT
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FX Breifing - Dollar weakness persists

FX Briefing 23 October 2009

Highlights

·        EUR-USD climbs over 1.50

·        Pound plunges on disappointing Q3 growth

·        Intervention pushes up Asian currency reserves

 

Dollar weakness persists

Towards the middle of the week, EUR-USD breached the 1.50 level for the first time since

August 2008. The final push came from US equity markets, which reacted very positively to Morgan Stanley’s quarterly earnings in particular. All in all, however, the euro only made moderate gains: towards the end of the week, the common European currency was around 1.5040, about 1½ US cents higher than a week ago.

 

On the macroeconomic side, there was little impetus. Most of the few US data released did not fully come up to expectations. Housing starts and building permits did not improve markedly in

September, and the number of initial jobless claims rose slightly in the middle of October. The European indicators were more upbeat. Most surveys for the euro area went up somewhat. According to preliminary figures, the eurozone purchasing managers’ index for the manufacturing sector rose over the expansion threshold of 50 again for the first time. The ifo business climate index also improved further in October, from 91.3 to 91.9. The French figures were even better. General business confidence increased from 86 to 89. It is striking that companies are now seeing the outlook for production in their own companies as almost neutral again. Furthermore, consumer spending rose by over 2% in September; the third quarter therefore remained more or less stable.

 

Sterling’s antics

The pound sterling cavorted around again this week. The pound’s recovery, which had begun

last week after remarks made by BoE deputy governor Paul Fisher, received additional support

from the Bank of England’s minutes. The minutes of the meeting at the beginning of October

revealed no intention of extending the asset purchase programme on the one hand, and on the

other, buoyed expectations that the UK economy could revert to positive growth rates in the third quarter. Against this backdrop, the euro dropped to about 90 pence.

 

The forex market’s reaction to the release of the preliminary UK GDP data for the third quarter was correspondingly harsh. The figures published on Friday show a further contraction in real GDP of 0.4% compared to the previous quarter, only marginally better than the –0.6% in Q2. The estimate shows that growth remained negative in nearly all sectors, including the financial services sector. After these figures, EUR-GBP rose to almost 0.92. Cable fell by around 3 cents to below 1.64.

 

Political resistance to appreciation

The downside to dollar weakness is the appreciation of most major currencies with the exception of the yuan and a few other currencies which are pegged to the dollar. Growth prospects in the Asian growth regions and also in commodity countries are much better than in most industrialized countries. The Asian countries are benefiting from robust growth in China; other countries such as Brazil, South Africa, Australia, Norway and Canada, are relying on commodity prices recovering. This, coupled with international investors’ growing risk appetite, is leading to high capital inflows into these regions and to a significant appreciation of their currencies. Thus the euro has risen by almost 8% since the beginning of this year; but the real has appreciated by 35%, the Australian dollar by 32%, the South African rand by 27% and the Norwegian krone by 26%. Even the Canadian dollar has gained about 16% against the US currency.

 

Meanwhile, however, there is increasing resistance to appreciation pressure. This week, the Brazilian government introduced a transaction tax on foreign equity purchases, which could put pressure on the real, at least in the short term. The Canadian central bank president hinted at possible measures to weaken the Canadian dollar. And many Asian monetary authorities are resorting to direct intervention to slow down the appreciation of their currencies.

 

The chart below, which shows the development of foreign currency reserves in leading Asian

countries since the end of 2008, gives some insight into these activities. It is clear that the reserves in most of the countries have soared. South Korea posted the biggest increase – 26%, followed by Hong Kong (24%) and Thailand and Indonesia (about 20% respectively). And China and Taiwan also gained 17 and 14% respectively. In absolute terms, China is the winner with an increase of $327bn; but Korea is doing very well too with over $50bn.

Stephan Rieke +49 69 718-4114


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

 

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.

© 2007 BHF-BANK Aktiengesellschaft

All rights reserved. Please mention source when quoting from it.

 

 

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