Friday March 9, 2007 - 15:38:30 GMT
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Forex Research - FX Briefing 9 March 2007 - Turmoil subsides
FX Briefing 9 March 2007
â€˘ Yen rally halted for time being
â€˘ ECB leaves door open for further rate rises, but end of tightening in sight
â€˘ Beige Book supports interest rate cut expectations
After last weekâ€™s turmoil, the forex markets have calmed down again. Together with the recovery in global equities, the yenâ€™s rally ran out of steam. USD-JPY remained volatile, but closed at 117.45 â€“ significantly higher than last weekâ€™s low of 115.16. The yen relinquished its sharp gains against the euro too. All in all however, the Japanese currency was still at its strongest level for three months. In view of the exchange rate movements over the past week, investors are apparently being much more cautious about building up carry trade positions on a large scale again. This week, EUR-USD moved in a very narrow trading range around 1.3150. The ECBâ€™s interest rate rise had no effect on this either. As the Bank of England left interest rates unchanged, the pound Sterling remained on the weak side.
As widely expected, the European Central Bank raised its main rate by a further 25 bp to 3.75%, and signalled that it was now switching back into wait-and-see mode again. The ECB Council will therefore monitor further developments very closely. The ECB Councilâ€™s growth projections were revised significantly upwards. Thus the experts are now expecting growth to average 2.5% in 2007 and 2.4% in 2008. Inflation projections for 2007 were revised downwards to 1.8% and raised slightly to 2.0% for 2008 due to higher growth. Against this backdrop, the Council still considers it important to take firm and timely action to keep price levels stable in the medium term.
Thus the Council has left the door open for a further rate rise. However, at the same time it has signalled that the end of the tightening cycle could be approaching. Jean-Claude Trichet himself has pointed out that the central bank sees the current interest rates as moderate rather than low as before. Furthermore, monetary policy was no longer described as â€śstill being accommodativeâ€ť, but as â€ścontinuing to be on the accommodative sideâ€ť.
The ECB Council appears to think that interest rates are now close to the appropriate level for the current economic situation. However, we are still expecting growth in the eurozone to have lost momentum by the next possible date for an interest rate rise in June; furthermore inflation is likely to be lower than currently estimated by the Council. We are thus not anticipating a further interest rate step.
With regard to the USA, the marketsâ€™ main focus was on the US central bankâ€™s Beige Book, which was released in preparation for the next Fed meeting on 21 March. On the whole, the report described the economy as expanding moderately. In some regions, growth had even continued to slow down. In market participantsâ€™ eyes, this will make interest rate cuts more probable, particularly in view of this weekâ€™s comments by Ben Bernanke on the touchy subject of the housing and mortgage markets, when he warned of increasing risks. After the release of the Beige Book, the Japanese currency shot up initially against the dollar, only to fall sharply again later.
There are several US economic indicators on next weekâ€™s agenda again. The main focus is likely to be on the first sentiment indicators for March. We are expecting both business climate and consumer confidence to have deteriorated somewhat. But there could be signs that the inflation situation is easing. After the significant increase in core CPI in February of 0.3%, we are only expecting it to rise slightly by 0.1% in March. All in all, the US data are not likely to lessen expectations that the US central bank is moving towards an interest rate cut.
There are no important European indicators due to be released next week. The only data likely to be of interest are the results of the ZEW survey. They could reveal whether the strong market movements over the last few weeks have had a negative impact on expectations.
Uwe Angenendt +49 69 718-3648
+49 69 718-3642
Foreign Exchange Trading
+49 69 718-2695
Matthias Grabbe / Klaus NĂ¤fken
+49 69 718-2688
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