FX Briefing - Central banks maintain expansionary stance
FX Briefing 6
Interest rates to remain at exceptionally low levels for an extended period
Asset purchase scheme extended again
Less liquidity needed due to financial market recovery
Central banks maintain expansionary
During the course of the week, the euro firmed somewhat
against the dollar. After the ECB had concluded the series of central bank meetings, EUR-USD
was around 1.4870 on Friday lunchtime, marginally stronger than a week ago.
This week, particularly important indicators were released
in the US. The data painted a mixed picture, however. The ISM
manufacturing index, for instance, improved from 52.6 to 55.7. This is the
highest level since April 2006 and suggests that Q4 GDP growth could turn out
to be as high as in Q3. For the first time in a long time, the employment
components signalled an increase in jobs. The ISM non-manufacturing index told
a different story, however: it rose less than the previous month, because the employment component, which
was already weak, fell sharply to 41.1. Like the ADP private employment figures, the
official labour market report for October is thus likely to show significant
job losses again of about 200,000, but this would be still an improvement over
However, the main topic of discussion was not the
economic indicators, but the central bank
meetings in four big countries. First on the agenda
was the Australian central bank: on Tuesday, it raised interest rates for the second time in four
weeks from 3.25 to 3.5%. As this had been generally expected due to the improvement in the economic
situation in Australia, it had little impact on the Australian dollar, which
had already gained over a third against the US currency in the last 12 months. Australia is tightening monetary policy, because the downswing
there was relatively moderate, and the sharp rise in commodity prices is now
boosting the economy.
Australiaās step did not have a signal effect on the central
bank meetings in other large countries. On Wednesday, the Fed made it clear
that no radical shift in monetary policy stance was on the cards. The FOMC
confirmed its near-zero interest rate policy unanimously, and stated that interest
rates were likely to remain low for a long time to come. Although the US growth rate rose to 3.5% in annualised terms in Q3,
the assessment of the economy in the FOMC statement was not much better than in
September. Although āhousehold spending appeared to be expanding, it remained
constrained by ongoing job losses, sluggish income growth, lower housing wealth
and tight credit.ā Furthermore ābusinesses were still cutting back on fixed
investment and staffingā.
The Open Market Committee also saw exceptionally low
levels of the federal funds rate likely
to be warranted for an extended period due to ālow
rates of resource utilisation, subdued inflation trends and stable inflation expectations.ā Thereupon,
EUR-USD jumped to its highest
level since the beginning of the previous week.
The UK central bank (BoE) kept the bank rate at 0.5%, but
increased the size of its asset purchase programme to Ā£200bn. Given that GDP had continued to
fall in the third quarter, however, markets had been expecting a larger
expansion; the pound therefore rose slightly against the dollar and the euro.
The BoE is expecting economic recovery to be slow; thus under-utilised
resources will continue to dampen inflation for some time to come. In the short
term, however, this will be offset by the impact of sterlingās depreciation, according
to the BoE. This could explain why the expansion of the asset purchase
programme was less than widely expected.
The ECB also still considers its low interest rate of
1% to be appropriate. It is expecting GDP growth rates to be back in positive
territory in the second half of the year, and the economy to recover at a
gradual pace in 2010. However, it concedes that the outlook is uncertain, as a
high number of the supporting factors will only have a temporary effect.
Against this background, price stability is expected to be maintained over the medium
term. According to Jean-Claude Trichet, however, less liquidity measures will
be needed in future due to improved conditions in financial markets. He said
that the governing council would make sure that the extraordinary liquidity measures
taken would be phased out in time to counter effectively any threat to price
When asked at the press conference whether the ECB
would prolong the 1-year tender in December, Mr Trichet merely replied that
markets were not expecting this. Compared to the Fed, there was more emphasis
on the necessity for a timelyexit from
the extraordinary measures, which boosted the euro again somewhat on Thursday afternoon.
There are some important eurozone indicators on next
weekās agenda. The advance estimates of GDP in Q3, for example: for Germany, we are expecting growth to have doubled compared to spring to +0.6% quarter-on-quarter. Unlike in Q2,
growth in the eurozone as a whole will
probably have picked up again too, albeit not quite as
much, to +0.4%. Just like new orders,
German production figures and the ZEW indicator are
also likely to have improved further,
which should continue to support the euro. The European
currency is generally boosted by improved data, even if these come from the US, because they tend to increase risk appetite and demand
for higher-yielding assets.
Peter Meister +49 69 718-2600
Grabbe / Klaus NĆ¤fken
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