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Friday August 27, 2010 - 13:55:29 GMT
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FX Briefing - Euro does not benefit from good eurozone economic data

FX Briefing 27 August 2010



Ifo goes up – Euro goes down

Dollar strengthens on double dip fears

ECB Council meeting: Will dovish comments be confirmed or corrected?


Euro does not benefit from good eurozone economic data


The single European currency lost some ground against the dollar on average again this week. After climbing over 1.33 at the beginning of August, the euro hovered around 1.27 this week. This seems rather odd, given that most of the eurozone economic indicators were much better than forecasted, in contrast to the US data, many of which were disastrous, fuelling fresh fears of a sharp economic slowdown.


On the European side, the German ifo business climate rose again slightly in August to a three year high, which was a very good sign. Admittedly, expectations fell by 0.4 points as expected, but this decline seems extremely modest, given the increase of over 3 points the previous month. Within the space of two months, the assessment of the current situation soared by 7 points, which shows that German growth is likely to have continued at a fairly robust pace in the 3rd quarter. Even in terms of figures alone, this cannot be taken for granted, because the Q2 GDP growth rate of +2.2% quarter-on-quarter in all components was extraordinarily high.


In the US, the string of weak data continued this week. The disappointment over the Philadelphia Fed manufacturing survey’s plunge into negative territory had not yet been fully digested when existing home sales plummeted by 27% compared to the previous month to a new all-time low. This indicates that the housing sector is still in a very sorry state.


Whereas the downward correction in home sales came as no surprise, the minimal rise in durable goods orders of 0.3% month-on-month was an unexpected disappointment. Because of higher car orders and the assumed recovery in aircraft orders, an increase of about 3% had been anticipated. Transportation orders came in more or less as expected, but capital goods orders plunged by 8%. They are now set to drop sharply in the whole of the 3rd quarter, and all hopes that investment might continue to accelerate at the same pace as in the first half of the year have been dashed. This, in addition to the sharp slowdown in growth in Q2, is fuelling double-dip fears. The negative trend is set to continue next week: the ISM manufacturing index could have plummeted in August, and the employment figures are not likely to provide much encouragement either.


As the recovery has ground to a halt, the Fed, which had not foreseen this either, will have to maintain its zero interest rate policy for some time to come. Furthermore, the Fed’s decision to keep the balance sheet at over 2 trillion dollars shows that there is unlikely to be an exit from quantitative easing in the near future either. These factors would normally tend to suggest a weaker dollar.


However, financial markets have reverted to crisis mode, in which the dollar, as a safe haven, appears more attractive than other currencies. Growth fears are clearly reflected in the development of yields: the yield on 10-year US Treasuries has now fallen to a mere 2.5%, and this week, it looked for a time as though German Bunds with a residual maturity of 10 years could soon be around 2%. The good economic data from Germany are being ignored or classed as unsustainable: because Germany is extremely export-oriented, it is widely feared that a slowdown in global growth could soon cast a cloud over the bright picture. On the other hand, positive surprises in US data, such as the recent decline in jobless claims, support the euro.


Growing pessimism about the US and global economy is not the only factor weighing on the euro: during an interview last Friday, Bundesbank president Axel Weber, who does not usually make particularly dovish comments, had suggested that the ECB should keep full allotment of refinancing operations until after the end of the year. This would help to alleviate potential liquidity tensions for banks at the end of the year. Mr Weber said that discussions about a possible exit would probably not be held until the first quarter of 2011.


It will therefore be interesting to see whether Jean-Claude Trichet confirms Mr Weber’s stance at next week’s ECB Council meeting, or whether he corrects it somewhat. The latter could give the euro a slight boost, especially as the ECB staff growth projections for this year are likely to be revised upwards significantly – from an average of 1.0% to around 1.5% – and moderately for 2011 too. However, Mr Trichet could emphasize that uncertainty remains extremely high and that economic risks seem to have increased again due to the developments in the US. The inflation projections will probably also remain more or less unchanged, i.e. well below 2%. There is therefore no pressure here to tighten monetary policy.


Prior to the ECB Council meeting, the forex market will be focused on the Kansas City Fed’s annual conference in Jackson Hole this weekend. If the underlying tenor of the speeches is something along the lines of: risks for the US and global economy still prevail, but a renewed recession is unlikely, that could support the euro.


Peter Meister +49 69 718-2600



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.


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