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Friday February 12, 2010 - 15:30:10 GMT
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FX Briefing - EU backing for Greece

FX Briefing 12 February 2010


EU government heads back Greece

French GDP increase rescues eurozone growth, Germany stagnates in Q4

Fed chairman Bernanke explains exit strategy

PBoC raises reserve ratio again


EU backing for Greece

Greece and its debt problems continued to have a major impact on market developments. At the beginning of the week, it was announced that an informal meeting of EU heads of state or government would be held on Thursday in Brussels; moreover, there were rumours that the EU would put together a rescue package for Greece. But the news that ECB president Jean-Claude Trichetwas cutting short his visit to Sydney to attend the meeting in Brussels really unsettled market participants. In view of the possible rescue measures the EU might take, yield spreads between 10-year Greek government bonds and benchmark Bunds, which had risen to almost 400 basis points at times, began to narrow again, and are currently at around 270 basis points.


As the tension eased somewhat, the euro strengthened to about 1.38 against the dollar. On Thursday afternoon, however, after the EU summit had ended, the euro started to tumble again. Some market players attributed the euro’s renewed weakness to the “disappointing” outcome of the summit. And indeed, the statement issued by the government leaders was vague to say the least, announcing that the eurozone member states would take “determined and coordinated action if needed to safeguard stability of the eurozone”. Greece, however, had not as yet asked for financial assistance.


At first glance, it looks as though not much has emerged from the summit, but this is a misconception. The crucial point is that the EU council has assumed official responsibility. If the worst comes to the worst, the EU, i.e. the eurozone member states, has promised to help Greece. It is up to the finance ministers, who are meeting next Monday and Tuesday, to propose, and if necessary introduce, concrete measures.


But the euro’s slide to below 1.36 against the dollar on Thursday and Friday was probably due more to other factors. US equity markets have continued their recovery; furthermore, after three bad weeks, initial jobless claims have dropped to 440,000. Conversely, eurozone Q4 GDP figures, which have just been released, show a significant slowdown in growth. Growth in the eurozone as a whole was a mere 0.1% compared to the previous quarter. France was the only country to post solid growth of 0.6%; Germany’s economy stagnated, and Spain and Italy actually reported declines of 0.1 and 0.2% respectively.


Bernanke explains exit strategy

Fed chief Ben Bernanke testimony before the House Financial Services Committee was postponed because of a snowstorm, but the prepared statement was published anyway. In it, Mr Bernanke outlines the Fed’s plans to revert to a normalmonetary policy stance. He indicates that the Fed is not intending to reduce the central bank’s balance sheet substantially for the time being (to do so, it would have to sell assets), and that liquidity is to be removed from the financial system by means of term deposits and reverse repo operations. The Fed is currently in the process of expanding the counterparties for reverse repo operations beyond primary dealers – to include money market funds, for example. The new term deposit facility should be available some time in the spring.


Provided that monetary policy tightening did not become more urgent, the Fed would test its liquidity draining mechanisms on a small scale initially; as a second step, the transaction volumes would be significantly increased. Raising interest rates would then be the third step. The interest rate on reserves (which now stands at 0.25%) would play a pivotal role as a monetary policy instrument.


Mr Bernanke is trying to make it clear that there are no imminent plans to tighten monetary policy. He therefore deliberately reiterates that “keeping the fed funds rate at an exceptionally low level for an extended period is warranted”. However, the Fed is not just making hypothetical plans, but pursuing a concrete goal. If, as we assume, growth in the coming months were to remain more or less robust, the US money market could start tightening around the middle of the year.


China raises reserve ratio again

The Chinese central bank, the People’s Bank of China, has raised the deposit reserve ratio by a further 50 basis points to 16.5% for large banks and 14.5% for smaller ones. China’s increased efforts to curb credit expansion are fuelling speculation that the government could allow the yuan to appreciate. In our view, however, the chances of this happening are rather slim: although exports have recovered somewhat, the export industry is probably still working below capacity. From China’s point of view, an appreciation of the yuan would slow down the less dynamic part of the economy.


One final point: according to rumours, the SNB intervened in the currency market again on Friday morning. Prior to that, EUR-CHF had fallen below 1.4650. As long as the SNB continues to intervene, there is little chance of the franc rising.

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.

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