FX Briefing - Retreat from risk: USD continues to strengthen
FX Briefing 05
ïƒ˜Greek stability programme does not reassure
ïƒ˜ECB remains on course, tries to inspire
confidence in Greece and the eurozone
ïƒ˜SNB intervenes to stop the franc appreciating
against the euro
ïƒ˜Debt problems weigh on equity markets
from risk: USD continues to strengthen
In the first half of the week, EUR-USD strengthened initially,
rising about 1 US cent to just over 1.40. From Wednesday afternoon on, however, the euro began
to tumble again. Towards the end of the week it dropped to around 1.37. Debt problems in Greece and some other eurozone member states continue to be the
main reason for the euroâ€™s weakness. Neither the EU Commissionâ€™s officially
approval of the Greek stability programme announced on Wednesday, nor ECB
president Jean-Claude Trichetâ€™s remarks after the ECB governing council meeting
on Thursday succeeded in allaying market participantsâ€™ fears. On the contrary:
towards the end of the week, yield spreads on government bonds of some European
countries over German Bunds widened (at different levels). Portugal and Spain are in the main line of fire, but even the yield spreads on
French government bonds have widened by about 10 to 36 points.
The press conference following the ECB meeting on Thursday
focused primarily on the debt problems. ECB president Jean-Claude Trichet tried
to win confidence in Greeceâ€™s budget consolidation plans. He also emphasized that the
Stability and Growth Pact was an effective disciplinary mechanism. As far as
monetary policy was concerned, Mr Trichet said nothing new. He reiterated that
the governing council would take decisions on implementing the gradual
phasing-out of the unconventional measures at the meeting in March.
Investorsâ€™ flight from risk is no longer just reflected in
European bond yields and EUR-USD
exchange rates. In equity markets too, rocketing public debt
is increasingly being seen as a threat to growth. In the first instance, this applies to Europeâ€™s
problem countries, where equity markets have plummeted. But almost all industrialized
countries are facing the same fundamental problem, namely that public deficit
must be radically reduced.
Investorsâ€™ risk aversion was heightened further by some new
economic data. The December figures for industrial new orders and output in the
producing sector in Germany were bitterly disappointing. Despite sentiment indicators signaling
a continuous recovery, industrial new orders fell by 2.3% and production by
2.6%. Given these data, there is less likelihood of reaching positive growth in
Q4; the outlook for Q1 is not all that rosy either.
On the US side, market participants were clearly focused primarily on
labour market developments. After the ADP data had made a favourable impression,
initial jobless claims turned out to be quite high again in the last week of
January, prompting heightened scepticism regarding Fridayâ€™s labour market
report, and further dampening the mood in equity markets. On Thursday evening,
for instance, the Dow Jones just managed, by the skin of its teeth, to close
The labour market report did in fact confirm that the US labour market is at a turning point. In January, only
20,000 jobs were shed; despite the job cuts in the public sector, the important
service sector showed an increase, as did the manufacturing sector.
Furthermore, the unemployment rate fell significantly from 10.0 to 9.7%. On the
whole, however, the figures are not good enough to dispel marketsâ€™ fears.
Following the usual pattern during the financial crisis, the
retreat from risk in the forex markets
boosted the yen and the Swiss franc. USD-JPY relinquished
its gains of the first half of the week and fell back below 90. There could
have been an unwinding of carry trades, which had speculated on Japanâ€™s interest rate disadvantage widening.
As a classical safe haven currency, the Swiss franc was also
bolstered by market participantsâ€™ risk aversion. The Swiss National Bank had
recently allowed the franc to appreciate slightly against the euro to around
1.47. On Friday morning, however, when the euro weakened further, the SNB
intervened, as it had threatened to do. In view of this, we are not expecting
the SNB to allow the franc to appreciate freely in the shorter term.
When Greeceâ€™s debt problems began to escalate, the pound Sterling was
regarded as an alternative to the euro for a time. But this idea now seems to have
been abandoned: parallel to EUR-USD, cable (GBP-USD) fell to a 9-month low of 1.5654.
Disappointing growth figures, ballooning public debt and the impending general
election, the outcome of which is uncertain, are not making the pound much more
attractive than the euro.
Stephan Rieke +49 69 718-4114
Grabbe / Klaus NÃ¤fken
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