Friday June 9, 2006 - 16:33:52 GMT
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FX Briefing 9 June 2006Highlights
â€¢ Bernanke hawkish
â€¢ US inflation data could set the scene for the summer break
â€¢ After interest rate decision, ECB turns lights to amber again
EUR-USD: feigning to be on the way up, only to break out below
After a firm start to the week with rates well over 1.29, EUR-USD then began to slip and at the end of the week broke out below the trading range of 1.29 to 1.27. At 1.265, the euro is the weakest it has been in a month. The yen, which was already weaker against the euro, also fell significantly versus the dollar this week. USD-JPY was trading at around 114 at the end of the week.
The euroâ€™s strength at the beginning of the week was due to unexpectedly soft US employment data. With only 75,000 new jobs, the figures were well below the market consensus view. This fuelled expectations that after 16 consecutive rate rises, the Fed could finally pause in its tightening process at the end of June. The very next day, however, these hopes were nipped in the bud, when Fed chairman Ben Bernanke expressed concern about the recent acceleration of inflation, and confirmed the FOMCâ€™s determination to preserve price stability in the long run. He also appeared convinced that the US economy was in a transition phase with growth remaining high, but slowing down from a fast to a more measured pace.
Mr Bernankeâ€™s hawkish comments were interpreted as meaning that the central bank would not pause in its tightening policy before the inflation rate slowed down. This gave the dollar a further boost. On the other hand, the Fedâ€™s apparently never-ending rate hike policy hit the stock markets hard. The Dow Jones fell almost 3% this week alone.
Given Mr Bernankeâ€™s remarks, June inflation data (due to be released next week) will be crucial: if the core rate is above the market consensus of 0.2% month-on-month, the Fed will very probably be forced to raise the fed funds rate by a further 25bp to 5.25%. If, on the other hand, inflation is more moderate, a tightening pause will be more likely again. In that case, the markets would probably have peace from the central banks until August.
For after its interest rate hike decision yesterday, the European Central Bank has turned the lights to amber again. The governing council still sees medium-term price stability risks, but after the 25bp interest rate rise to 2.75%, it is no longer in a state of strong vigilance. Thus a further rate rise before the summer break is out of the question. However, Jean-Claude Trichet has made it clear that if the economy develops as the ECB is expecting in its main scenario, the council will continue the gradual removal of its accommodative monetary policy. The ECBâ€™s main scenario sees an economic growth rate of 2.1% (median) this year and 1.8% next year. Thus compared to March, growth forecasts have been revised slightly downwards because of higher oil prices. For the same reason, the council has raised its inflation forecast for this year slightly to 2.3%. However, the forecast for 2007 remains unchanged at 2.2%.
As European economic growth is currently moving along at this pace, we are expecting the ECB to stick to its quarterly interest rate hike pattern. Thus the refi rate should increase to 3.25% by the end of the year. However, inflation rates in the eurozone are likely to be quite high, particularly at the beginning of next year, at over 2.5% (partly because of the VAT increase in Germany). We therefore expect two further rate rises next year to 3.75%. The interest rate spread to the US would then narrow significantly, which would support the euro in the medium term. In the short term, US inflation data published next week will probably have a decisive influence on forex markets. If a clear trend emerges in one direction or another, this could continue for quite a long time in view of the impending summer break.
The next FX Briefing will be published on 23 June.
Uwe Angenendt +49 69 718-3648
+49 69 718-3642
Foreign Exchange Trading
+49 69 718-2695
Matthias Grabbe / Klaus NÃ¤fken
+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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