Friday November 16, 2007 - 19:26:52 GMT
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FX Briefing - Yen and dollar boosted by crisis fears
FX Briefing 16 November 2007
Â· EUR-USD retreats a little from record highs, despite strong Q3 GDP growth
Â· Pound falls after BoE signals interest rate cuts
Â· Japanese government wants to prevent the yen from appreciating too rapidly
Yen and dollar boosted by crisis fears
Financial marketsâ€™ attention is still focused on the credit crisis. The main topics under discussion include the necessity for banks to reveal further asset writedowns, increasing credit spreads on commercial property loans, the possibility of rating agencies downgrading certain credit insurers and the consequences this would have on the huge municipal bond market. In its Monthly Bulletin, the ECB reports that banks might face capital constraints because they have to keep leveraged loans on their books because they cannot be placed on the market. Goldman Sachs CEO Lloyd Blankfeinâ€™s statement that the leading US investment bank did not expect to take significant asset writedowns on mortgage related assets allayed fears to some extent. Mr Blankfeinâ€™s opinion on credit markets as a whole, however, is sceptical. The sustained problems banks are up against are illustrated by the example of Citigroup, which issued $4bn of 10-year notes at a spread of 190 basis points above Tnotes. Not only is this considerably more than a few months ago, but also about 30 bp over the usual current pickup for an AA rating.
Market players always reduce risk positions on increased fears of a crisis. On the forex markets they then tend to stock up on low interest-rate currencies. Thus the yen and the Swiss franc benefited most. USD-JPY fell below 110 for the first time since the middle of 2005, plunging as low as 109.12. During the course of the week, the US currency recovered slightly, ending the week at around 110 again.
The BoJ is probably in favour of the yen strengthening, at least up to a point. The central bank has repeatedly pointed out the risk of distorted allocation, which includes overstimulation of exports as a result of excessive yen depreciation due to speculation. In view of the present economic uncertainties, however, these structural risks do not appear to be so acute. The BoJ is now emphasising that under the present circumstances no further interest rate hikes are planned. And Japanese Prime Minister Yasuo Fukuda has for the first time hinted at the possibility of government intervention to prevent the yen from appreciating further too rapidly.
When risk aversion increases, the US currency has usually strengthened against most currencies, particularly against the typical carry currencies. This seems to have happened again. The euro did not lose much ground against the dollar. It fell temporarily to 1.4522, but was back at 1.46 at the end of the week. CAD, NOK, AUD, GBP and ZAR all suffered greater losses â€“ of up to 4% in a week.
Signs that monetary policy could become more cautious had a big impact on investors in CAD and GBP. This impetus was particularly pronounced in the case of the Canadian dollar: in view of its recent massive appreciation, and the developments in the US, the Canadian central bank now sees downward risks for growth and inflation. The Bank of England is even signaling interest rate cuts. In its latest inflation report, the UK central bank states that the rate cuts priced in by the markets are in line with the medium-term inflation target and necessary to safeguard growth.
In the third quarter, real GDP growth in the eurozone rose by a hefty 0.7% quarter-on-quarter. Robust growth will have contributed to the relative strength of the euro. However, probably only to a limited extent, as the ECB, presumably knowing quite well what the results were going to be like, had already signalled beforehand that an interest rate step was not on the agenda for the time being. Furthermore, market participants are less worried about Q3 than about how the present situation will develop.
However, not many indicators next week are likely to throw much light on this. Markets will of course be quite interested to see how the Belgian business confidence index and the advance EMU purchasing managersâ€™ index turn out, particularly as the ZEW index declined significantly in November. But the Ifo business climate index, which is published the week after next, is likely to be of much greater interest. This also goes for German consumer price data, which should reveal more about the impact of the substantial energy price rises in November.
In the US, there are some housing market indicators on next weekâ€™s agenda. It looks as though the downward trend will continue here. Moreover, the minutes of the last FOMC meeting will be released. Its growth and inflation forecasts will be of prime interest. All in all, however, we are not expecting much fresh impetus for the forex market from fundamentals next week.
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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