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Friday April 27, 2007 - 16:14:13 GMT
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Forex Market News - FX Briefing 27 April 2007

FX Briefing 27 April 2007

• EMU: economic optimism confirmed by sharp improvement in business climate
• USA: likelihood of an interest rate cut increasing
• EUR-USD: awaiting its chance to break out
• Japan: BoJ not under pressure to act

Lots of record highs
EUR-USD hit its 2004 high for a short time on Wednesday. After the release of the weak US GDP data, the euro broke its record, rising to 1.3683, but then fell back again slightly. The yen had started the week on a more upbeat note, due to a moderate upward revision of interest rate hike expectations. Shortly before the release of the semi-annual Outlook Report, it apparently dawned on market participants that the BoJ would go on expecting positive inflation rates in the medium-term. However, later in the week, the yen fell again, first against the euro, and then from Thursday on versus the dollar too. In the latter half of the week, EUR-JPY rose to 162.80, thus hitting a fresh high. USD-JPY is still well below the peaks of nearly 122 reached in January and February, but is still over 119, despite the GDP figures.

The euro remains fundamentally well supported: the economic indicators, particularly business
climate data, are confirming the buoyancy of the eurozone economy. The ifo business climate index improved in April, coming close to its December peak again; in both France and Italy, business confidence climbed to six-year highs. In an interview with Börsenzeitung, Dr Yves Mersch, governor of the Central Bank of Luxembourg, already hinted at the possibility of the growth projection for the EMU being revised upwards. The positive mood was dampened somewhat by the correction on the Spanish stock market. Contrary to the trend on the other European and US stock markets, which nearly all reached new peaks, growing fears that the Spanish property boom might be coming to an abrupt end triggered heavy losses, particularly in property- related shares.

On the US side, the data remain mixed. Whereas durable goods orders in March looked a bit brighter, the weakness in the housing market continued. Consumer confidence declined further in April. The Conference Board survey shows that households have now become more skeptical about the labour market outlook. As regards the FOMC meeting on 9 May, it is still uncertain whether the central bank will open the door a bit wider for a rate cut. This will probably depend on the development of the PCE deflator in March, the ISM survey and, first and foremost the labour market report for April.

In our view, US data will tend to support the notion that interest rates might be cut and thus remain dollar negative. As far as Europe is concerned, optimism knows no bounds. Nevertheless, we do not at present see any factors that could shake this confidence. Thus we still see a good chance of the euro breaking out over a longer period.

BoJ not under pressure to act
In its semi-annual Outlook Report, the BoJ has released its growth and inflation forecasts for the fiscal years 2007 and 2008. The majority of the governing council members are expecting real GDP growth of around 2.1% for both years, which is more or less in line with the growth pace over the last four years. However, the BoJ has had to lower its inflation forecast for the fiscal year 2007 once again; the inflation rate is now only expected to be 0.1%, as opposed to 0.8% a year ago. However, with its inflation forecast of 0.5% for the fiscal year 2008, the central bank is confirming its expectation that prices are tending upwards.

The BoJ report indicates that the bank still basically wants to continue with its tightening policy: growth is above potential, so the output gap is closing. The central bank is explicitly expecting increased capacity utilization, tighter supply and demand conditions, and moderate rises in unit labour costs und wages. However, other than in most other countries, this development is welcome. The BoJ sees price stability as being “around 1%” (within a range of 0 to 2%). Comparing this with the forecast of 0.5% for the year 2008, which is still relatively far off, makes it clear that monetary policy will remain highly accommodative for quite a while. All the more so as the government is against raising interest rates.

The latest economic indicators have been mixed. On the demand side, Q1 GDP is expected to be quite favourable – with solid contributions from private consumption and net exports. It should however be taken into account that after the weak March figures, household spending will not be off to an easy start in Q2. But Q1 looks quite grim on the supply side. Industrial production was down 1.3% from Q4. It was obviously possible to cover demand from existing stocks, which probably curbed GDP growth in Q1. After the extraordinarily strong fourth quarter, a setback in Q1 does not fundamentally shake the BoJ’s positive economic outlook, but the figures do not give any reason to tighten monetary policy in Japan further either.

Stephan Rieke +49 69 718-4114
Economics Department
+49 69 718-3642
[email protected]
Foreign Exchange Trading
[email protected]
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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