Saturday August 20, 2005 - 10:46:33 GMT
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FX Briefing 19 August 2005FX Briefing 19 August 2005
- Forex markets believe in robust US economy, bond markets show concern
- Higher energy prices push up US inflation, but core rate remains stable
- Up trend in US industry is intact
Dollar recovers after solid economic signals
The US currency has advanced again since the US trade balance figures were released last Friday. At first it was mainly the euro that weakened, while the yen continued to rise a little, getting close to JPY109. But on Tuesday Japan’s currency retreated too. At the end of this week USD-JPY is back at JPY110.50 – slightly higher than at the beginning of the week, but clearly weaker than in the previous weeks. The euro dropped by almost 3 cents to USD1.2180, which means it is back in the old June/July range.
The US trade balance figures “triggered” the euro’s drop against the dollar. At almost USD59bn, the trade deficit was higher than most experts had forecast. But apparently the deterioration was not extensive enough to reawaken concern about the current account and thus to lengthen the dollar’s slide. Atypically, the bad trade figures actually became the signal for moving out of the euro.
With a moderate 0.1% increase, July industrial production in the US did not live up to expectations. The decline in the automobile sector was a little stronger than expected and the increase in electricity output remained limited. But the August surveys of the New York Fed and the Philadelphia Fed show that the development in industry remains favourable. The NY Empire Manufacturing index dropped a tad (from 23.91 to 23.04), but this still indicates a strong expansion. Moreover, important individual components improved further, e.g. new orders, inventories, and employment. An almost 8-point gain took the Philly Fed index to 17.5. Here too, some components posted very strong increases.
While industry clearly did well, US price data was mixed. Inflation rates reflected the strong energy price rises. In addition to oil and oil products, natural gas and electricity were also more expensive. Producer prices rose by 1.0% month-on- month, consumer prices by 0.5%. The core rates (ex food and energy) on the other hand showed no inflationary pressure. At the consumer level, prices increased by a moderate 0.1% month-on-month; producer prices rose by 0.4%, which was mostly due to car discounts ending.
The markets seem to be divided as to how they should interpret the current price development. On the one hand, the massive energy price increase burdens companies and households. And the fact that individual retailers have voiced concern about sales fed the fear that consumption might be suffering. On the other hand, the US economy is booming, and inflationary pressure is rising because energy prices and labour costs are going up. The Fed, for instance, worries about this. The central bank no longer wants to accommodate demand and is thus planning on raising interest rates further.
The capital markets went along with the latter story until recently. The yield on 10-year Treasury notes had temporarily risen above 4.40%; the fed funds future had priced in an overnight money rate of 4.25%. But after the FOMC meeting on 9 August and as a reaction to the new oil price highs, concern about economic growth returned. The Treasury yield has dropped to around 4.20% and at the short end it is now expected that the Fed will stop tightening when the fed funds rate reaches 4%.
The flattening of the yield curve indicates that the capital markets have become more sceptical about economic prospects. But forex traders did not follow suit: The dollar’s recovery indicates sustained US growth optimism. Although we basically share this view, we expect the euro to get some support next week: Both the ZEW index and the ifo index should improve, while the most important US indicators (durable goods orders and the University of Michigan index) could be somewhat mixed.
Stephan Rieke +49 69 718-4114
+49 69 718-3642
Foreign Exchange Trading
+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.
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