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Friday January 13, 2006 - 20:20:15 GMT
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FX Briefing 13 January 2006

FX Briefing 13 January 2006
• Dollar’s weak spell comes to an end
• ECB President Trichet confirms markets’ interest rate rise expectations
• Beige Book expected to give favourable view of US economy

ECB still on course to raise interest rates

After the strong movements of the first week in January, the forex market has stabilised slightly this week. After the release of the US employment situation report last Friday, USD-JPY slipped from 116 to 114.50, but then moved sideways. The other Asian currencies and commodity currencies followed a similar pattern. On the other hand, the rates of most European currencies began to crumble a little: after the ECB press conference, EUR-USD weakened temporarily to almost 1.20, and is close to 1.2050 at the end of the week.

Trichet: recovery strengthening, interest rate rise expectations correct
The markets were disappointed with the results of the ECB Council meeting: in view of the favourable European economic indicators, markets had not been reckoning with an immediate interest rate increase, but had expected the ECB to take a slightly more hawkish stance. Some ECB representatives had signalled in the last few weeks that a further tightening of monetary policy was imminent. However, there was no mention of this in the ECB’s press release. Mr Trichet commented repeatedly that the ECB would base its decisions on the incoming data.

The latest statement is similar to December’s in many respects. It also points out growth risks: in this connection the central bank mentions the negative impact of high oil prices and concerns about global imbalances and weak consumer confidence in the euro area. However, this cannot really be seen as an indication of a softer line in monetary policy: firstly, the ECB had pointed out these risks in its December statement as well, but had nevertheless increased the refi rate. It is hardly conceivable that the central bank will suddenly ignore these aspects completely. Secondly, the ECB sees some improvement in consumer confidence. This is at least a first small step towards a robust economic upswing. Thirdly, it remains aware of the inflation risks too. Fourthly, it still considers the interest rate level to be historically low and its monetary policy stance to be accommodative. Thus the future development of interest rates is clear, provided that the growth risks do not materialise.

Mr Trichet said that the growth rate is getting close to potential. He moreover stated that recent data indicates further expansion in the first months of this year. Thus the current development is basically in line with the ECB staff projections. If the euro economy remains on track, another interest rate hike is due in March, and more will probably follow. At least this is what can be deduced from Mr Trichet’s remark that the markets have understood the central bank’s intentions quite well. He stated that the ECB’s message at the last press conference “has been well-received and interpreted,” and this also includes what the markets expect in the way of future interest rate decisions. Mr Trichet also made it clear that his statement that the ECB “will continue to monitor very closely all developments with respect to risks to price stability” should be taken as a comment on interest-rate policy.

USA: economic data remains favourable
Although the coming week will start relatively quietly in the US due to Martin Luther King Day, the next few days will probably be dominated by news from the US. Industrial production is likely to have risen again substantially in December by 0.5% mom; capacity utilization could thus have reached a five-year high. However, it should be noted that in view of the cold weather, utilities have probably increased their output. Furthermore the NY Fed Empire State Manufacturing index and the Philly Fed index will give a first indication of the manufacturing industry’s development in January. Whereas the index for New York will probably have fallen compared to the high December figure, we are expecting a significant improvement in the Philadelphia Fed’s district. On the whole, the outlook is quite favourable, particularly because inventories will soon need to be stocked up.

December consumer prices are unlikely to change the inflation picture much. But signs of diminishing price pressure like in the previous months are not to be expected either. Quite the contrary: the CPI core rate will probably rise slightly from 2.1% to 2.2% year-on-year. Although this does not signify an immediate inflation problem, it is the highest figure in six months.

However, the Beige Book will be the centre of attention. It is due on Wednesday evening and will serve as the basis for the Fed meeting on 31 January. We expect it to present a favourable view both of the manufacturing sector and – given the very good result for the non manufacturing ISM index – of most services industries. Retailers apparently did quite well in December. The further improvement in consumer confidence over the past weeks speaks for a continuation of this trend, despite the slight increase in gasoline prices. All in all, we therefore think the upcoming data will support the dollar, especially in the run-up to the Fed meeting.

Stephan Rieke +49 69 718-4114
Economics Department
+49 69 718-3642
[email protected]
Foreign Exchange Trading
[email protected]
Jörg Isselmann
+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.
© 2005 BHF-BANK Aktiengesellschaft
All rights reserved. Please mention source when quoting from it.


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