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Friday September 3, 2010 - 14:30:59 GMT
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FX Briefing - More Growth

FX Briefing 3 September 2010



US economic data brighten up: improvement in ISM manufacturing and employment

Australia and Switzerland post strong growth rates for H1

Swedish central bank raises interest rates, expects robust growth to continue

ECB predicts weak growth momentum – despite upward revision of forecast


More growth


The forex market remained relatively calm this week. Whereas EUR-USD rose to over 1.28, the European single currency fell slightly against the Swedish krona, the Swiss franc and the yen, and also versus “commodity currencies” such as NOK, AUD, BRL and ZAR. The markets seem to be deviating somewhat from the “flight from risk” pattern and starting to react to positive growth signals again.


One reason for this is that the majority of economic data from the US have been better than expected: this applies particularly to the ISM index for the manufacturing sector, which rose to 56.3 in August, signalling that production is still expanding robustly. Furthermore, there was an unexpected improvement in consumer confidence, the housing market is showing signs of stabilising, and investment in machinery and equipment in Q3 does not appear to have been as weak as feared. There are even some rays of hope in the labour market: there were less job losses in August than had been feared, and – in connection with the extensive upward revisions in the previous two months – private sector employment rose much more than originally anticipated. Moreover, the employment component in the ISM survey, for instance, suggests that the manufacturing sector is willing to create new jobs.


The markets seem to be reacting to positive news from certain countries. Australia and Switzerland, for example, posted far better growth figures than expected. In Q2, Australia’s economy grew by 1.2% compared to the previous quarter; at the same time, the Q1 growth rate was revised upwards by two tenths to 0.7%. Likewise Switzerland, where in Q2, economic output rose by 0.9% quarter-on-quarter; Q1 growth was adjusted from 0.4 to 1.0%. Sweden’s central bank raised interest rates by 25 basis points to 0.75%, simultaneously revising its growth forecast for 2010 to 4.1% and for 2011 to 3.5% and signalling that interest rates need to go up.


The eurozone is not looking too bad either. This week, Eurostat confirmed its flash estimate for Q2 of 1.0% quarter-on-quarter. Growth was almost solely due to domestic demand, particularly private consumption and investment in machinery and equipment. Exports rebounded remarkably strongly, but as the increase was more or less cancelled out by higher imports, they only made a small – direct(!) – contribution to growth. Furthermore, the growth rates for the two previous quarters were revised up slightly to 0.3% in Q1 and 0.2% in Q4/2009. On the basis of these figures, the eurozone would reach an average annual growth rate of 1.4%, even if growth were to flatten out in the second half of the year.


At its meeting last Thursday, the ECB governing council left its monetary policy stance unchanged. In addition, the council announced that it had decided to continue to conduct its main refinancing operations as fixed rate tender procedures with full allotment until the end of this year’s 12th maintenance period (i.e. until 18 January). The ECB is apparently refraining from normalising monetary policy more rapidly, in order to offer some troubled banks, particularly in the peripheral eurozone countries, reliable access to liquidity.


As at the end of every quarter, the new ECB staff projections for GDP growth and price developments were also announced at the press conference. The ECB projections only give ranges, which are raised as the forecasts go up; to make things simpler, we are only quoting the mid-point of the ranges.


The ECB has only revised its inflation projections marginally upwards – by one tenth respectively – to 1.6% for 2010 and 1.7% for 2011. This is probably largely on account of much higher commodity prices – particularly for non-energy commodities – than three months ago. The growth forecasts, on the other hand, were adjusted more substantially. Real GDP growth in the euro area is seen at 1.6% this year, i.e. 0.6 percentage points more than in June. The forecast for 2011 was revised up by 0.2 points to 1.4%.


Overall, there has been a significant revision for 2010. Only three months ago, the ECB had projected that GDP growth would range between 0.7% and 1.3%. The new projection is thus 0.3 points above the top end of the range. Against this backdrop, one could wonder why monetary policy still remains “appropriate”, despite the fact that the recovery is proceeding at a much more rapid pace.


As far as the future is concerned, however, the revision is rather meagre. Average annual growth rates of 1.6% and 1.4% respectively in 2010 and 2011 imply quarterly growth rates of 0.3% in the 6 quarters up until the end of 2011, which would be well below potential. In our view, the ECB’s forecast is too conservative. Neither the EU Commission’s business and consumer surveys nor the purchasing manager indices nor national surveys suggest a marked slowdown in expansion in the third quarter. The same also applies to new orders, which are showing a large overhang for Q3.


In our opinion, there is a good chance of the eurozone benefiting from further robust global growth, especially as price competitiveness (based on the real effective exchange rate) has increased too. The ECB itself is expecting global growth (excluding the eurozone) of 4.4% – which is excellent, particularly as the US economy is not showing much momentum. Additionally, higher production capacity utilisation is improving corporate profitability. The favourable financing conditions and the fact that the labour market is stabilising will also have a positive impact. All in all, therefore, we can envisage a more rapid pace of growth in 2011 than the ECB is predicting.


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.


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