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Forex Research - FX Briefing 23 February 2007

FX Briefing 23 February 2007
Highlights
• Market shrugs off BoJ interest rate step
• US growth rates likely to be revised down sharply
• ifo: business expectations disappointing

The week of the carry traders
This week, markets focused on the BoJ’s interest rate decision. After much to-ing and fro-ing, the Japanese central bank finally took the plunge and raised the key interest rate of the world’s number one funding currency by 25 basis points to 0.5%. But it took care to point out that it intended to keep interest rates very low.

The forex markets reacted almost defiantly to the news from the Far East, and the yen tumbled across the board: the euro rose to a new record high of ¥159.33; the dollar came close to its January 4-year high of ¥122.19 as well. At the end of the week, USD-JPY was at 121.44. This week the euro also climbed to a new record high of 1.6290 against the world’s number two funding currency, the Swiss franc. In contrast, EURUSD remained more or less unchanged during the course of the week at around 1.31.

Given the extremely low inflation rates and sustained weak consumption, market players are not expecting the BoJ to take aggressive action in the future either. The latest interest-rate decision was not even unanimous, and the government is likely to exert all its influence to stop interest rates rising too quickly. This is why the market is not expecting any further interest rate hikes, at least not for the next six months. We share this opinion. Thus carry trades will remain attractive, at least for the time being, making it difficult for the Japanese currency to hold its own against the high-interest rate currencies.

The market was very quiet this week – only the US consumer prices caused some movement: core CPI (ex food and energy) rose unexpectedly by 0.3%. This once again put a damper on speculation that the Fed might cut interest rates, particularly as the central bank had made it very clear in the minutes of its last meeting that inflation remained its predominant concern. But at the same time, it is still expecting the core inflation rate to decline gradually.

The revision of US growth figures is therefore likely to play an important role next week. The consensus forecast is for a very sharp downward correction. After a growth rate of 3.5% was reported initially for the fourth quarter, the figure could be corrected to less than 2.5%, given weaker growth contributions from net exports and inventory investments. In that case, US growth would have been below potential for the third time running. This should then reduce inflationary pressure in the long run and fuel hopes of the Fed cutting interest rates.

Eurozone data were mixed. Although the business climate improved in February in most countries, the German business climate deteriorated as expected. The most surprising thing about the ifo figures was that business expectations deteriorated too. It had been hoped that growth would accelerate after the VAT increase quarter; but, if this development continues, growth acceleration is only likely to be moderate. This tallies with our view that the economy will lose momentum significantly during the course of the year.

The data will certainly not prevent the ECB from implementing its announced interest rate hike in March. However, after that it could decide to adopt a “wait and see” attitude. The data due to be released next week suggest this too. In our opinion, money supply growth reached its peak in December. In the coming months growth rates are likely to decline. After the very strong growth rates over the last few months, we think a sharper downward correction is possible. The release of German price data for February will not indicate any increased inflation pressure either. Furthermore, the January eurozone inflation rate is likely to be revised downwards from 1.9 to 1.8%. Against this backdrop, EUR-USD will probably continue to move sideways next week too.

Uwe Angenendt +49 69 718-3648
Economics Department
+49 69 718-3642
volkswirtschaft@bhf-bank.com
Foreign Exchange Trading
devisenhandel@bhf-bank.com
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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