FX Briefing - Euro falls to 12-month low against yen
emphasise âexceptionally low interest rates for extended periodâ
ïWinter weather affects
economic data in USA and Europe
threaten to downgrade Greece further
ïECB set to discuss
further steps to normalise money market conditions
falls to 12-month low against yen
dollar remains on a firm footing. In spite of attempts by US central bank
chairman Ben Bernanke and his colleagues to dampen rate hike expectations
triggered by last weekâs increase in the discount rate by repeatedly stating
that interest rates would remain âat exceptionally low levels for an extended
periodâ, EUR-USD slipped to below 1.35 temporarily. Towards the end of the
week, however, EUR-USD recovered somewhat to almost 1.36. The dollar thus
relinquished its gains again.
first glance, this weekâs US economic data painted a mixed to gloomy picture.
Market participants were particularly shocked by the sharp drop in consumer
confidence in February (from 56.5 to 46.0) and new home sales plummeting to a
record low in January. Initial jobless claims also rose to almost 500,000. But
the adverse weather conditions had probably had a negative effect on the
figures, which is why they had relatively little impact on the forex market.
markets were more affected by the drop in the ifo business climate index. It
only fell moderately, however, from 95.8 to 95.2. Moreover, the decline was
primarily due to a deterioration in the assessment of the current situation,
particularly in the wholesale and retail sectors. The expectation components
actually improved marginally. This indicates that snow and ice played a major
role here too. Markets were particularly concerned that the upward trend of the
past ten months had been interrupted â especially as EU Commission survey data
for the eurozone painted a similar picture.
string of negative reports about Greece
put the euro under additional pressure. A fresh national strike shows that
there is still considerable political resistance to the governmentâs budget
cuts. Furthermore, the biggest Greek banks were downgraded, and the rating
agencies S&P and Moodyâs indicated that they may make further cuts to Greeceâs
credit rating. S&P, whose rating of BBB+ is two notches below Moodyâs,
referred to downside growth risks. Moodyâs, whose rating for Greece
is still A2, called for tangible progress in stabilising public finances.
yen was the clear winner of the week in the forex market. During the course of
the week, USD-JPY fell by over two yen to 89; EUR-JPY dropped by three yen to
121.30. On Thursday, EUR-JPY actually hit a 12-month low at 119.66. According
to traders, the movement was triggered by some large Japanese exporters,
apparently worried that the euro could fall even further, selling euros. The
transactions are said to have sparked stop-loss orders which in turn
accelerated the euroâs slide.
movement was probably prompted by perceived risks for the eurozone. But Japanâs
economy is looking remarkably robust at the moment too. Industrial production
rose in January by a whopping 2.5% month-on-month, after increasing by 1.9 and
2.2% the previous months. At the present level, production is thus already 4.5%
above the average for the fourth quarter. The trade surplus also increased
significantly; from December to January, exports and imports rose by more than
Further steps towards normalising money market conditions
week, the ECB will discuss whether and to what extent the extraordinary
monetary policy measures still in operation can be phased out. The last
12-month tender was held in December, and the 6-month tender being held at the
end of March is to be the last one. The next step is likely to be reverting to
variable rate tenders for refinancing operations with a maturity of 1 or 3
months. Full allocation at the refinancing rate will probably only apply to the
weekly tenders in future.
will be interesting to see whether the ECB gives, or hints at, a specific time
frame for reverting to ânormal money market conditionsâ. The excess liquidity
in the money market could disappear at the beginning of July, when the âŹ442bn
12-month tender matures. Then, if adequate liquidity is no longer available,
money market rates are likely to shoot up. The ECB staff
projections are also on next Thursdayâs agenda. We are not expecting any
significant changes from Decemberâs estimates. The inflation forecast could
turn out to be slightly lower, however.
view of the problems with Greece
and the fact that the recovery in the eurozone appears to have stalled, markets
have priced out expectations of interest rate hikes to a large extent. If,
however, the ECB comes up with a precise plan to normalize money market
conditions, interest rates could rise sooner than expected, without a shift in
monetary policy. Thus if there are any surprises in store, they are fairly
certain to be on the side of higher rates, which ought to support the euro, at
least for the time being.
Grabbe / Klaus NĂ€fken
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