Friday January 27, 2006 - 22:38:08 GMT
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FX Briefing 27 January 2006FX Briefing 27 January 2006
â€˘ Lively investment activity and rising employment support US growth
â€˘ Boom in Germany strengthening on a broader basis
â€˘ Robust US economy makes further interest rate hikes more likely
Prematurely counted out: US economy continues to expand
At the beginning of the week, the euro stabilized substantially. The market was fuelled particularly by Fed representativesâ€™ comments which market players perceived as confirmation that the end of the tightening cycle was imminent. Comments made by William Poole, president of the St. Louis Fed, made a big impression. He stated that the marketâ€™s expectation of one or two further interest rate hikes was â€śsensibleâ€ť. Mr Poole, who is known as an inflation hawk, seemed relatively unconcerned about inflation risks. A speech given by Timothy Geithner, president of the New York Fed, also added fuel to the euro bullsâ€™ fire. He emphasized the necessity of reducing the US current account deficit. The heavy losses on the US stock markets at the end of last week, were also partly responsible for the lack of confidence in the dollar. As a result, last Monday, EUR-USD rose by almost two US cents to over 1.23 for a time.
The yen only joined in halfheartedly: on Monday, USD-JPY fell from 115.3 to 114.4. This could have been partly because the Japanese stock market came under pressure due to US technology shares falling, TSEâ€™s technical problems, and the Livedoor scandal. Also, those investing in the euro for example in expectation of the ECB tightening monetary policy, probably favoured EURJPY positions over EUR-USD positions for carry trade reasons. Anyway, during the course of the week, EUR-JPY rose from just over 140 to over 142.
On Wednesday, EUR-USD started to weaken: As neither the excellent ifo institute data nor the weak US existing home sales had a positive impact on EUR-USD, long positions in euro were closed and profits taken. Finally, the unexpectedly moderate development of consumer prices in Germany in January (unchanged at 2.1% year-on- year) could also have had an influence, since there will probably be less necessity to increase interest rates if inflation remains halfway moderate.
It was mainly the solid durable goods orders that helped the dollar to rise further. The 1.3% increase in December orders, combined with a significant upward revision of the previous month, support the assessment that the economic expansion will continue in 2006, particularly in the manufacturing sector. If shipments come in strong, this will underpin the expectation that investment in equipment and software contributed significantly to growth in the fourth quarter. The initial results for the US GDP were published Friday afternoon.
Moreover, initial jobless claims have dropped to under 300k in the past two weeks. If we also take the labour market gauges of the various surveys (e.g. Empire State Manufacturing and Philly Fed index) into account, employment is likely to have risen quite steeply in January by well over 200k. This would confirm the robustness of growth too, especially since a rise in employment entails higher income and higher consumption spending.
Finally, the Fed has made it very clear that its interest rate policy depends on the further economic development, and on resource utilization in particular. Even if the central bank refrains from giving any explicit hints about its future interest rate steps, (which in our opinion is by no means sure) the unbroken growth trend, and strong employment growth imply a higher likelihood of further tightening. If the Fed refrains from giving guidance on the course of interest rate policy, this does not mean that central bank rates are without direction. Against this background we expect the US currency to firm further.
Stephan Rieke +49 69 718-4114
+49 69 718-3642
Foreign Exchange Trading
+49 69 718-2695
Matthias Grabbe / Klaus NĂ¤fken
+49 69 718-2688
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