Friday January 19, 2007 - 15:27:42 GMT
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Forex - FX Briefing 19 January 2007
FX Briefing 19 January 2007
â€˘ EUR-USD moves sideways despite mainly favourable US data
â€˘ BoJ veering towards interest rate hike in February
Yen under pressure again
The yen came under pressure again this week. The main reason for this was probably the Bank of Japanâ€™s decision to leave interest rates unchanged. In the run-up to the monetary policy meeting, numerous rumours and some remarks from government officials had caused confusion but in the end, the BoJ left its overnight call rate at 0.25%. Markets interpreted this as confirmation of the notion that monetary tightening in Japan will at best proceed very slowly. And until this â€śworking hypothesisâ€ť has been proved wrong, market players are gaining a bit of time to profit from carry at least.
The main winners were the pound, the Australian and Kiwi dollars, eastern European currencies like the zloty and the forint, as well as the Turkish lira and the rand. EUR-JPY climbed over 157, close to the high at the beginning of January. USD-JPY gains remained relatively modest, but the US currency did reach a new 13-month high at 121.60.
During the course of the week, EUR-USD remained in a relatively narrow trading range of 1.29 to 1.30, with a slightly firmer tendency. The largely favourable US economic indicators apparently failed to lend the dollar fresh impetus. Short-term yield spreads, which had widened in US bondsâ€™ favour the previous week, as expectations of an interest rate cut were priced out, moved mainly sideways too.
Thereâ€™s no smoke without a fireâ€¦
There are more and more signs that the Bank of Japan will raise interest rates in February or March at the latest. The amount of rumours circulating before each meeting seems to be increasing. The main reason for the unrest before the meetings could be government circles putting public pressure on the BoJ to hold its horses. Moreover, on Thursday, three of the nine council members voted against waiting further, and in favour of monetary tightening. In our view, such open dissent is a clear indication that opinion in the council is increasingly shifting in favour of raising interest rates. Furthermore, BoJ governor Toshihiko Fukui stated in the press conference, that there were no substantial differences of opinion between the minority and the majority: the majority simply thought they should await further data. Finally, Mr Fukui also pointed out that even if the inflation rate, which is very low as it is, slowed down further (particularly due to the energy price decline), an interest rate hike would not be any less likely.
In our opinion, GDP data for the fourth quarter, due to be released mid-February, will probably give the BoJ good arguments for raising interest rates. According to Governor Fukui, the development of private consumption is a crucial point. Up to now, the BoJ has only been assuming that the weakness of private consumption in Q3 was due to temporary factors. We expect Q4 data to support this view with significant acceleration in private consumption. If GDP data confirm this, we expect the overnight call rate to be raised to 0.5% in February.
In this scenario â€“ the strong Japanese GDP data we are expecting for Q4, and the growing likelihood of a BoJ interest rate rise â€“ carry trades remain a dangerous game. It should also be noted that a meeting of G8 finance ministers is taking place in Essen on 9-10 February. Major international events of this type have in the past led to discussions on the yen being fundamentally undervalued in the light of global imbalances. Even if the BoJ has up to now produced more smoke than fire as regards interest rate policy, it should not be taken for granted that the yen will stay weak for ever.
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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