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Friday May 11, 2007 - 14:46:37 GMT
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Forex Market News - FX Briefing 11 May 2007 - Move in haste, repent at leisure…

FX Briefing 11 May 2007
• Highlights
• Dollar firms after central bank meetings
• ECB announces interest rate step in June, but gives no guidance beyond that
• Fed waits for further proof of slowing core inflation

Move in haste, repent at leisure…
Not the text book way: The ECB confirms its intention to raise the refi rate in June, the Bank of England raises its bank rate by 25 bp to 5.50% – and what do the European currencies do? They drop against the dollar. The euro has fallen to below 1.35 at the end of the week, cable to 1.98. Most of the Scandinavian and eastern European currencies lost even more this week (between 1 and 2%). None of the Asian currencies moved much, USD-JPY went sideways, staying close to 120. The Australian dollar gained around 1% against the prevailing trend because of excellent labour market data, while the NZD followed the European currencies downwards.

A week ago it had already looked as if the US currency might be heading for a correction and the development in the past few days has confirmed this. It is now mainstream thinking that the euro area’s economic outlook is exceptionally good. Exchange rate and bond markets have priced this in. The incoming data confirm the good impression but do not give the markets any fresh impetus.

Apparently the ECB does not intend to fuel expectations for higher interest rates any further. On Thursday, the central bank confirmed that it is planning to hike interest rates in June by switching from “monitoring closely” to “strong vigilance”. But the press got nowhere when it tried to push ECB president Trichet for comments on interest rate policy beyond June.

From our point of view it is sensible not to give “guidance” beyond the next few months. Everybody is optimistic about growth but one should not forget that there is always considerable uncertainty about the growth path. For instance, back in June 2006, the ECB staff projections had forecast 2007 GDP growth at 1.8%, as had many other economists.

It is quite plausible that growth will lose some momentum in the coming quarters. Weaker domestic demand in the US might affect the export oriented emerging market economies and commodity producers. Housing markets and building activities in some regions of the euro area might slow. There is also a chance that the expansive impulse coming from the stock markets might be levelling off.

If growth calms down somewhat, the ECB would not have to raise interest rates above 4%. The European GDP data coming in next week are already likely to be somewhat less impressive than in the fourth quarter.

The Fed’s Open Market Committee met on Wednesday. It kept its cards close to its chest for now. The central bank stated that growth has slowed this year, but it still expects moderate growth in the coming quarters. The core rate is still described as “somewhat elevated”, which markets interpreted as a hawkish statement. The recent favourable data had obviously raised hopes for a softer stance.

In our interpretation, the Fed has become more dovish. Not long ago, in January, it had explicitly said that additional firming may be needed. At the time it had looked as if growth might be picking up somewhat and the housing market might be stabilising. In March this turned into “mixed indicators” and an ongoing adjustment process on the housing market. Now, in May, mixed indicators have turned into a slowing of growth.

It comes as no surprise that inflation is still classed as elevated: No central bank worth its salt would sound the all-clear on the stability front after a single month of favourable figures (March in this case). But we are confident that the April CPI figures will confirm that core inflation in the USA is slowing. This would lower the hurdles for an interest rate cut a little further – especially since Q1 GDP growth is likely to be revised down to less than 1% given the March trade balance figures, and the outlook for private consumption in Q2 is not that brilliant.

Stephan Rieke +49 69 718-4114
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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