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Friday July 23, 2010 - 15:03:21 GMT
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FX Briefing - German economy in a party mood (BHF)

FX Briefing 23 July 2010


Bernanke expecting slow recovery, but also preparing for double dip

Ifo improves markedly in July, growth in Germany set to remain robust in Q3

Inflation rates pick up in eurozone


German economy in a party mood

After flirting with 1.30 at the beginning of the week, EUR-USD weakened somewhat as the week progressed. The US reporting season delivered a mixed bag of disappointing results and (for the most part) positive surprises, causing some volatility in equity and currency markets. Fed chairman Ben Bernanke’s monetary policy testimony before the respective committees of the Senate and the House of Representatives confirmed the more cautious monetary policy stance, thus echoing the minutes of the last FOMC meeting.


Mr Bernanke told the members of Congress that, in the event of a significant slowdown in the recovery, the Fed was basically prepared to take further policy actions to boost the economy. However, the Fed continues to see the US economy expanding at a moderate pace.


Speculation about the possibility of the Fed implementing further easing measures was probably one reason why US Treasury yields hit new lows. During the course of the week, the yield on 2-year Treasuries fell to an all-time low of 0.55%, and the yield on 10-year T-notes dropped to just under 3%. In the forex market, however, the Fed’s dovish rhetoric helped to strengthen the dollar. The dollar’s rebound could also reflect fears of a global economic slowdown, as even though the short end of the US curve is still extremely firm, the interest rate advantage of 2-year Bunds over the equivalent US bonds narrowed by nearly 10 to 15 basis points during the course of the week.


This continued until Friday, when the preliminary ifo business climate results were released. They revealed a further significant improvement in the business climate in Germany in July; the index rose from 101.8 to 106.2 – its biggest increase since German reunification. At 106.8, the current assessment is now nearing its top level; only during reunification and the boom of 2006- 2008 has it been higher. It is also remarkable that, despite this positive assessment, the business expectations for the next six months have risen by a further three points to 105.5. What is more, all sectors – manufacturing, wholesaling, retailing and construction – are unanimous in their positive assessment of the business situation.


The business climate data are the first concrete signal that German and European robust economic growth will continue in the third quarter. At around 1.5% quarter-on-quarter, Q2 German GDP growth is set to overstate the trend. However, the business climate bodes well for Q3 too – in spite of the sovereign debt crisis in southern Europe and the austerity measures.


In the short to medium term, the majority of economic data from Europe are likely to be upbeat. In addition to the purchasing managers indices and the ifo business climate, Q2 GDP figures from the UK – with a sharper-than-expected quarter-on-quarter increase of 1.1% – give a foretaste of what is to come.


This could also ease the sovereign debt problem to some extent. At this point of time, we cannot say what risks the European banking stress tests, which are due to be published on Friday evening, will reveal. In our view, however, the fact that the risks are now more transparent will have a soothing impact. Any problem cases which may emerge will doubtless be taken in hand by the relevant regulatory authorities.


Against this backdrop, ECB policymakers are not likely to contemplate further easing measures as the Fed has done. Given the consumer price developments in the eurozone, the ECB could even strike a more hawkish tone. The inflation rate will probably rise by about half a percentage point to 1.9% in July – the flash estimate will be published on Friday. The inflation rate is set to remain at around this level for the rest of 2010. All in all, therefore, we are assuming that the ECB has welcomed the return of liquidity in the money market and the subsequent increase in money market rates. In view of this and the relatively favourable economic environment, the interest rate advantage on the European side could well widen.


From a European perspective, therefore, there are several factors in the euro’s favour at present. However, uncertainty on the US side is halting this momentum. During the next few weeks, a series of important US indicators are on the agenda, including GDP data for the second quarter and, in the first week of August, the ISM indices and the labour market report. The FOMC meeting will then be held on 10 August. Should the data turn out to be worse than expected, the euro’s chances would diminish significantly.

Stephan Rieke +49 69 718-4114



Economics Department

+49 69 718-3642

[email protected]

Foreign Exchange Trading

[email protected]

Matthias Klein

+49 69 718-2175

Matthias Grabbe / Klaus Näfken

+49 69 718-2146 / -2683


This report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and its affiliated companies (together "BHFBANK 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.


This document is published by us in German and English only. Publications in other languages have not been authorised by us.


© 2010 BHF-BANK Aktiengesellschaft

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




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