| Currency rates now setting the tone – November bfinance rates and FX consensus |
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| 08/11/2004 | |
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With the ever-soaring euro, exchange has been traded for interest in the rate debate. "History teaches us that the United States tend to launch currency depreciation policies at the onset of presidential mandates", reminds Antoine Brunet, an economist with HSBC. Now that the American people has renewed its trust in the Bush administration, we might have more perspective on the euro-dollar prospect. "The Bush administration should affirm its preference for a more flexible foreign exchange market", say the economists of IXIS CIB. For now, the market reaction was mild, but the dollar resumed losing value in the days following the US presidential election. According to our survey ran before the re-election of President Bush, market analysts see a stabilisation of the euro against the dollar at 1.26 at 3 and 6 months, slightly above the current forecasts of respectively 1.23 and 1.25. But the experts consulted by bfinance are sharply divided. For instance, Citigroup bets on a strong depreciation of the greenback that would push the European currency at 1.33 in 6 months, but Natexis sees the euro giving some ground to the dollar and landing at 1.17 over the same horizon. "While the euro has remained within the 1.20 – 1.24 dollar range over the last few months, it has breached the 1.24 ceiling to top at 1.28, in line with the fundamentals", adds Michael Schubert, an economist with Commerzbank. The rather positive numbers that came out before the election did not either elicit any enthusiasm for the US dollar. "The movements of the euro were coherent with the last statistics that came out", comments Michael Schubert. On its side, Lehman Brothers draws attention to the American budgetary policy and the long-lasting debate around the twin deficits that is more likely than ever to deepen with the second Bush administration. "There is not entity, be it physical, moral or sovereign, that can spend 6% more than what it earns, without ending up being controlled at 100% by foreign interests, as pointed out by Warren Buffet", says John Llewellyn. Nevetheless, it seems rather difficult for the markets to agree on a point from which this situation becomes perjudicable. "If the United States were a country like any other, this point would long have been reached, with a 4% deficit usually thought to be sufficient to set off a monetary crisis", keeps saying John Llewellyn. But the United States is not like any other country: the current account deficit slipped by 3 to 4% of the GDP at the end of the 2001 recession to 6% today, even with a moderate depreciation of the greenback. "We clearly expect a new period of weakness for the dollar. And as many market players, we ask ourselves if we are not at the beginning of the slope", analyses John Llewellyn. "A weaker dollar will be necessary to reduce the ex-oil commercial deficit of the United States", says Bruce Kasman at JP Morgan. Wait and see In the UK, all the attention is for now focused on inflation, under constant threat by a possible surge in housing demand and consumer borrowing. But the successful gradual monetary tightening proved to be enough successful to convince the MPC to leave rates unchanged at 4.75% when it met on Thursday November 4th. But risks remain, especially in the housing sector. "Given the scarcity of spare capacity, a strengthening of the global economy could easily lead to domestic overheating. With earnings growth rapidly approaching the zone the Bank of England thinks is inflationary, further rate hikes cannot be excluded", says Raymond Van der Putten, an economist at BNP Paribas. The economist explains that the longer the Bank keeps the base rate unchanged, the higher is the risk that a new wave of mortgage lending be generated with consumers believing that a high has been reached. "Hence, we expect the Bank to keep a tightening bias in the coming months. But rhetoric might not be enough. To keep the tightening momentum, the Bank may want to push through one final "insurance" rate hike in the first half of 2005 to ensure that inflation's gradual upward drift over the next two years will be contained" writes Van der Putten. In the end, a 25bp hit at the beginning of 2005 is now a scenario bought by an increasing number of banks that still fail to reach a complete consensus, with a median still standing at 4.75 in April 2005. But for the next three months, the MPC is likely to stay clear of any hike. "Expect the inflation report that follows (November 10) to recognize the risks in the text, but show central forecasts that point toward a reacceleration in growth and rates remaining on hold", sums up Malcom Barr at JPMorgan Chase Bank. ECB watching There was only limited change with regard to short rates compared to the previous month's forecasts. The median of our consensus at 3 and 6 months still stand at respectively 2% and 2.25% for the ECB base rate and at 2% and 2.50% for the Fed funds. "As soon as September, commentaries from the ECB board pointed to the likelihood of a rate hike. The ECB stressed the fact that its rates were at a historically low level and deserved to be continuously monitored. Since then, the central bank didn't budge from its initial stance, but the increase of the oil price of course did increase its worries", writes Michael Schubert. For JP Morgan, there is no risk that the ECB tighten its monetary policy in the first half of Q1 2005. Laurent Fransolet, an economist with the New York-based bank, deems that the market expects a first hike at the end of the first quarter. In turn, the bank pushed back its hike forecast and now sees a European repo rate at 3% at the end of 2005, compared to 3.5% in the previous consensus. News pointing to a limited slowdown of the American economy and the FOMC minutes emphasising the upward leeway available to the monetary authorities led analysts to revisit their rate prospect, which now stand at 2.07% by year-end 2005. Bad employment news and the continuous rise of the oil price limited the upward review, according to Terry Belton at JP Morgan. Long rates Forecasts for long rates remained largely stable compared to the previous consensus, while being slightly drawn toward the bottom, losing 4bp at 4.21 on a 3-month horizon and letting go 3bp at 4.36 on a 6-month horizon. In the US, our pool of economists sees 10-y rates standing at respectively 4.48 and 4.46, respectively losing 2bp and 20bp in 3- and 6-month time. But the landing might be a hard one. "When the bond bubble bursts, the rates will rise quickly. It could be caused by public finance problems or the depreciation of the dollar. Foreign investors will then require more attractive returns to finance the American deficit", warns Martine Aubert, an economist with HSBC-CCF. F.P. and J.L. |
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Articles of the same Serie : Consensus
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