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FX Briefing - Euro: little upward potential in the short term

FX Briefing 25 June 2010

 

Highlights

China loosens dollar peg, but (initially?) only allowing gradual appreciation

US housing market still depressed, but economic recovery is underway

Fed remains in wait-and-see mode

Markets eye maturing one-year tender and US labour market report with caution

 

Euro: little upward potential in the short term

 

EUR-USD seems to be settling at around 1.23. At the beginning of the week, in the initial enthusiasm over the People’s Bank of China’s announcement that there would be more flexibility in the exchange rate of the yuan, the dollar came under pressure, and EUR-USD headed towards 1.25. However, when it became clear that China would only allow its currency to appreciate at a snail’s pace, the gains were reversed.

 

The forex market is still reacting sharply to signs of crisis in financial markets and doubts over the global economic recovery. Accordingly, the dollar benefited from negative reports from the US housing market, whereas the EUR, CAD, AUD and other currencies which are regarded as “riskier” lost ground. Although it was clear that the improvement in home sales over the last few months had been primarily due to the homebuyer tax credit programme, the more upbeat figures had been expected to continue until May. Contrary to expectations, however, existing home sales posted a sharp decline in May, and new home sales plunged by 33% to their lowest level since the statistics were introduced in the 1960s.

 

The FOMC also confirmed the downbeat mood. In its latest statement, the Fed underlines its intention of keeping interest rates at an exceptionally low level for an extended period, particularly in its downbeat assessment of the economic situation. In its April statement, the Fed had constantly emphasized that the recovery was gaining momentum, maintaining, for instance, that economic activity was continuing to strengthen. Now the Fed merely states that the economic recovery is proceeding. Furthermore, it comments that financial market conditions have become less supportive of economic growth, largely because of developments abroad.

 

One should not be too pessimistic, however. After the strong quarters Q1/2010 and Q4/2009, it is hardly surprising that the pace slowed in the second quarter. And it is well known that the residential construction sector and housing market in the US are still suffering as a result of the housing surplus, high household debt levels, unemployment and tight lending.

 

But that does not mean that the recovery is in danger. The manufacturing sector is enjoying quite robust growth. Industrial production is set to increase by over 1.5% in the second quarter, and the ISM index and durable goods orders (excluding volatile aircraft orders) are signalling that the upswing will continue. Non defense capital goods orders ex aircraft indicate a significant rise in investment in machinery and equipment. Moreover, consumer sentiment has improved in the last few months, which should support private consumption.

 

We are expecting next week’s key US economic indicators to corroborate this assessment for the most part. We predict that consumer confidence will have improved somewhat; the ISM manufacturing index could have declined slightly, but will still be on a high level. The labour market figures could be disappointing at first glance. Around 250,000 jobs could have been lost in the public sector in June, because considerably less staff are now needed for the census. However, after the weak performance in May, there could have been a catching-up movement in the private sector.

 

But as the labour market figures will not be released until Friday, nervous market players will have plenty of time to worry. Furthermore, the ECB’s €442bn one-year tender matures next Thursday, which could also be cause for concern. There are some observers who see this sparking tension in the money and bond markets. Widening credit spreads for southern European government bonds could also indicate these concerns. At any rate, in the run-up to these events, upward potential for EUR-USD is likely to be limited.

Stephan Rieke +49 69 718-4114

 

Economics Department

+49 69 718-3642

volkswirtschaft@bhf-bank.com

Foreign Exchange Trading

devisenhandel@bhf-bank.com

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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