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Friday February 5, 2010 - 16:26:13 GMT
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FX Briefing - Retreat from risk: USD continues to strengthen

FX Briefing 05 February 2010


Greek stability programme does not reassure markets

ECB remains on course, tries to inspire confidence in Greece and the eurozone

SNB intervenes to stop the franc appreciating against the euro

Debt problems weigh on equity markets


Retreat 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 euro’s weakness. Neither the EU Commission’s officially approval of the Greek stability programme announced on Wednesday, nor ECB president Jean-Claude Trichet’s remarks after the ECB governing council meeting on Thursday succeeded in allaying market participants’ 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 Greece’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.


Investors’ 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 Europe’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.


Investors’ 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 Friday’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 above 10000.


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 markets’ 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 Japan’s interest rate disadvantage widening.


As a classical safe haven currency, the Swiss franc was also bolstered by market participants’ 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 Greece’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



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.

© 2007 BHF-BANK Aktiengesellschaft

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



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