Monday September 12, 2005 - 10:23:55 GMT
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FX BriefingFX Briefing 9 September 2005
* US government grants significantly higher funds for hurricane relief
* Fed representatives see higher risks for price stability
* Uncertainty about outcome of German elections increases
* Markets count on re-election of Koizumi as prime minister in Japan
Market sentiment begins to turn in favour of the dollar
The US dollar has recovered slightly from the effect of the hurricane. EUR-USD fell by just under 2 cents to below USD1.24, whereas USDJPY rose by approx. JPY1.5 to JPY110.50. Several factors were responsible for this. Firstly, energy prices continued to fall. Towards the end of the week, futures contracts on the NYMEX for gasoline and heating oil were back to prehurricane levels. Moreover, the Congressional Budget Office (CBO) presented a first estimate of the economic consequences of the hurricane. According to this, the annualized growth rate in the second half of the year could turn out to be ½ to 1 percentage point less. Given the momentum of the US economy before Katrina struck, this would not be crippling. In addition, the government has stocked up the funds of USD10.5bn first made available by a further USD52bn, so that, together with insurance payments and funds raised privately for reconstruction, a considerable “spending programme” will be available.
Also it seems that the Fed is not intending to have an interest rate pause for the time being. Neither the Beige Book nor the speeches of various Fed representatives indicate a change in interest rate policy. The Beige Book, which only refers to the time before Katrina, emphasizes a growing shortage of labor supply and cost pressure due to energy and commodity prices while economic activity remains robust. The president of the FRB of San Francisco, Janet Yellen, sees price stability increasingly at risk, but also underlines some growth risks. The president of Chicago Fed, Michael Moskow, sounded remarkably hawkish. He said that core inflation was running at the upper end of the range that was consistent with price stability. If the inflation rate continued to increase, people might also begin to expect permanently higher inflation, which would force the Fed to adjust monetary policy accordingly. Up to now there was no evidence of an increase in inflation expectations but the Fed should still take appropriate measures to keep inflation well contained.
The burst of growth brought about by the resumption of economic activities in the Gulf coast states and the start of rebuilding work, together with a monetary policy aiming to counteract higher inflation expectations, will, in our view, have a positive effect on the dollar. It is not clear to what extent the at first mainly weaker economic indicators will affect the exchange rate. The trade statistics for July, which will be published next week, will probably have deteriorated mainly due to energy prices. Retail sales figures in August will show the impact of weak automobile sales but at the same time the higher gasoline prices will make them look better than they really were. Industrial production in August is likely to have been weak too – the first effects of the hurricane will be evident here. The same applies to purchasing managers’ surveys of the New York Fed and the Philadelphia Fed for September and the University of Michigan’s consumer confiVolkswirtschaft: dence index. Katrina will probably have had a negative influence on them too.
This weekend Japan will be electing a new lower house of parliament. All opinion polls are pointing to prime minister Junichiro Koizumi being confirmed in office. The yen has benefited from the prospect of Mr Koizumi’s re-election for some time now; his victory is widely expected and has been priced in. Therefore we do not expect this to affect exchange rates much. In Germany, however, uncertainty about the elections has increased: Currently it looks as though it will be a close race between the governing coalition and the opposition. Moreover, the death of a direct candidate in a Dresden constituency means that voting there will have to be postponed. The official election result will thus be delayed by at least two weeks. Particularly if the result is close, the formation of a government might have to be postponed because the outcome in Dresden could, in an extreme case, shift two seats in the Bundestag to one side or the other. This increased political uncertainty will tend to burden the euro.
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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