Friday May 21, 2010 - 15:11:32 GMT
Share This Story
BHF-Bank - www.bhf-bank.com
FX Briefing - Euro: risks outnumber the benefits
FX Briefing 21 May 2010
ÔÉė EUR-USD recovers to about 1.25, but reFX Briefing - mains vulnerable to further losses
ÔÉė Eurozone exports likely to be bolstered by weaker euro
ÔÉė Higher import and administrative prices may lead to higher inflation rates
Euro: risks outnumber the benefits
The last two weeks were not happy days for the euro. The aid package drawn up by heads of government and state over the weekend of 8/9 May with the support of the ECB and the International Monetary Fund only succeeded in stabilising the single currency briefly. There then followed seven days of decline, with EUR-USD crashing down at 1.2144 last Wednesday. Some of the dust has settled since then, and prices have recovered to around 1.24.
This calm resulted firstly from technical factors: EUR-USD was heavily oversold by any standards. Secondly, massive intervention by the Swiss National Bank to bolster the euro may also have played a role; the SNB is currently trying to keep EUR-CHF above 1.40. And in the short term, the euro may have been supported by some weaker US economic data and by signals from the Fed that a tightening of monetary policy is not an urgent priority for now.
Although the euro has stabilised for now, it remains extremely vulnerable to further declines in value. On the one hand, it is difficult to assess whether the rescue package will indeed function in an emergency. If, for instance, the national parliaments reserve the right to decide on support on a case-by-case basis, this package is less likely to restore confidence among investors. And the ECB‚Äôs promise to keep the sovereign debt market functioning by purchasing bonds also sounds half-hearted. That is why there are still latent fears of European government bonds defaulting. This might explain why the demand for liquidity on the money markets has increased sharply again.
On the other hand, even if the tension on the bond markets subsides, the budgetary cuts will probably come at the expense of growth. This suggests that the ECB will continue its expansionary monetary policy and leave its low interest rates unchanged. Whatever happens, the euro has little to offer for investors for now.
However, the scenario ‚Äúlong spell of eurozone stagnation on account of tough austerity measures‚ÄĚ is not necessarily the full picture. While tough consolidation would probably dampen domestic demand, the decline in the value of the euro is likely to bolster exports. In recent weeks, the euro has lost value not only against the US dollar but against most non-European currencies. On a trade-weighted basis, the euro has shed around 8.5 % in the year to date (EUR-USD by 13.7 %), according to ECB calculations. So for the first time since 2005, the euro‚Äôs external value is approaching a level that many economists would, at least roughly speaking, consider to be fair. This should boost international competitiveness and fuel exports, especially in a reasonably dynamic global economic environment.
In growth terms, exports could therefore replace the subdued domestic demand. The downside of a weak currency, however, is that imports would become more expensive. Rising import prices could push inflation rates higher, particularly if this coincides with the treasury seeking to increase revenues by raising indirect taxes and administered prices. This effect might not be extreme, given the limited scope for passing through price increases, but it could give rise to an uncomfortable conflict of interests for the ECB.
Stephan Rieke +49 69 718-4114
+49 69 718-3642
Foreign Exchange Trading
+49 69 718-2695
Matthias Grabbe / Klaus N√§fken
+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.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."