Friday November 19, 2010 - 15:24:58 GMT
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FX Briefing - Ireland to accept aid.
FX Briefing 19 November 2010
ï Ireland to work with EU/IMF to shore up the Irish banking sector
ï US industry remains on the road to recovery
ï Ifo business climate set to confirm upbeat sentiment
Ireland to accept aid.
This week forex market developments continued to be heavily influenced by the discussions about a bail-out for Ireland. Interestingly, this time round, it was the European institutions â particularly the EU Commission and the ECB â who were trying to persuade a reluctant Irish government to accept aid. Due to the constant uncertainty, towards mid-week EUR-USD plunged to below 1.35 â its lowest level since the end of September. The sceptical mood was probably exacerbated by some weaker US data: the New York Empire manufacturing index dropped sharply in November, and core consumer and producer prices showed that inflationary pressures have eased significantly.
In the second half of the week, however, the gloom began to lift again. In the run-up to discussions between Ireland and the EU Commission, the ECB and the IMF, there were stronger indications that Dublin might be prepared to accept international aid. What form this aid would take still remains to be seen. As Irelandâs budget problems stem mainly from government guarantees or capital injections for Irish banks crippled by the housing crisis, the Irish government seems to be aiming at a sort of bank rescue plan. Finance minister Brian Lenihan spoke of negotiations on contingency capital to be made available to finance any additional capital requirements that may occur. Central bank governor Patrick Honohan is expecting a loan of âtens of billions of eurosâ.
The downward trend in US economic data, which caused a bit of turmoil at the beginning of the week, was not confirmed later on in the week. Industrial production declined slightly in October, but this was mainly due to a sharp weather related drop in utility output. The manufacturing sector, however, got off to a good start in the fourth quarter, with an increase in production of 0.6% compared with the previous month. Furthermore, the Philadelphia Fed index rose sharply in November (from 1.0 to 22.5), thus cancelling out the drop in the NY Empire manufacturing index (from 15.7 to â11.1). The regional surveys are obviously still volatile; the correlation between them and their national counterpart, the ISM purchasing manager index, seems to have loosened somewhat anyway. In both the NY Empire manufacturing index and the Philly Fed index, expectations for the future improved significantly in October and November, which is a good sign.
The third pleasant surprise came from initial jobless claims. The figure for the second week of November, 439,000, underpins the decline posted the previous week. The 4-week moving average has thus fallen to 443,000 â its lowest level for over two years.
With the ongoing discussions in Ireland, which are expected to take several days, the European bond markets are likely to calm down a bit. The fundamental environment remains favourable. We are expecting most economic data from the US to be positive: GDP growth in the third quarter will probably be revised up slightly from 2% quarter-on-quarter annualised to around 2.4%. Durable goods orders ex transportation (i.e. if the expected drop in aircraft orders is not taken into account) are likely to improve markedly. And â particularly important â retail trade figures suggest that nominal expenditure could have risen substantially by around 0.6% in October. Taking the development of the CPI as an indicator of the PCE deflator, the real increase could be about 0.4% compared to the previous month. That would be a very good start into the fourth quarter for private consumption.
In Europe, the national purchasing manager, confidence and business climate indicators are due to be released next week. Here we see the basic trend continuing âsideways to upwardsâ. The rise in ZEW economic expectations suggests that the German ifo business climate index could have gone up even further.
The forex markets are seeing the more positive economic data from the US as negative for the dollar: the more momentum the global upswing gathers, the more investorsâ risk appetite grows. As long as the Fedâs anti-deflation stance seems justified and US short-term rates remain low, risk appetite will increase, resulting in outflows from the dollar, in the form of carry trades for example, into other higher-yielding currencies. Thus the environment is likely to remain negative for the dollar and positive for the euro for the time being.
Stephan Rieke +49 69 718-4114
+49 69 718-3642
Foreign Exchange Trading
+49 69 718-2175
Matthias Grabbe / Klaus NĂ€fken
+49 69 718-2146 / -2683
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