| Consensus rate and forex forecasts: Euro benefits from ECB and Fed stance |
|
|
| 09/03/2008 | |
|
The spread between European and US short-term interest rates has widened more than anticipated two months ago, contributing to a significant shift out of dollar assets. Expectations that the dollar would make some headway against the euro were dashed as the European currency breached through the symbolically important 1.50 level, approaching 1.60. The recent dollar sell-off may have been prompted by a jump in US foreclosures. The Mortgage Bankers Association (MBA) said there had been a surge in failing home loans among sub-prime borrowers, those with the poorest track record of keeping up repayments on their loans. Repossession rates for these borrowers were running at 13.4% in the final three months of 2007. The figures have fuelled expectations that the Federal Reserve will respond to the housing crisis by cutting interest rates more aggressively this week, adding further pressure on the dollar. Following the collapse of Bear Stearns, the Fed lowered the discount rate by 25bps and the federal funds rate by 75bps. The dollar has been impacted by a stream of weak economic data and the monthly payroll numbers provided further evidence of this. Employers cut 63,000 jobs in February, the highest in five years and the first month to month loss since 2003. Economists were expecting a gain of 22,000 jobs for the month. Our surveyed economists now expect the federal funds rate to drop 75bps in three months compared to 50pbs last month (their forecasts were made before the release of the payroll report). Just ask Ted Traders in the money markets are also showing signs of concern. One indicator known as the TED spread, which measures the difference between three-month Treasuries and Libor, has widened to 120bp. "After all the manoeuvres by the Fed since summer, the TED spread is still five times normal levels," says David Rosenberg, chief economist at Merrill Lynch. In general, the increasing spread differential between US and European rates reflect future economic expectations in the two regions. "In the short term, as long as the US slowdown remains intact and does not spread to Europe, the dollar/euro exchange rate will favour the euro," says Olivier Bizimana, economist at Crédit Agricole. A number of factors may have contributed to the 20% appreciation of the dollar relative to the euro since the fourth quarter of 2005: interest-rate differentials, the position of the two regions in the economic cycle, small but significant shifts in global central bank reserves, the level of national indebtedness (deficit financing) and trade flows. The first signs of a significant economic slowdown in Europe would remove an important source of support for the euro. Our surveyed economists are indeed waiting for the European Central Bank (ECB) to become more attuned to the risks of growth rather than inflation, which would move the ECB to lower rates. This wait has been a bit like Waiting for Godot (for ECB chief Jean-Claude Trichet to show up and announce a bias in favour of lower rates). Waiting for Trichet Last week, Trichet left ECB rates unchanged, once again confirming upside risks to price stability. Economic fundamentals in Europe also remain solid. The introductory statement in the press conference, however, was less hawkish than in January and there are signs that the central bank is moving to a neutral stance. "While the economic fundamentals of the euro area are sound, incoming data have confirmed that the risks surrounding the outlook for economic activity lie on the downside." Evidence of a European slowdown is already emerging. The first GPD estimates for the euro zone showed a slowdown in growth from 0.8% in the third quarter to 0.4% in the fourth. Growth in France came in at 0.3% for the fourth quarter, below expectations. Our surveyed economists are divided on the direction of the European Central Bank in the next three months. Commerzbank, Unicredit, Lehman Brothers, Merrill Lynch and Société Générale expect no change in monetary policy before May, while HSBC, JP Morgan, BNP, Crédit Agricole, UBS and Natixis anticipate an easing. The average forecast has switched in favour of a 25bp easing compared to the previous month. The average forecast for Europe's repo rate for August is 3.5% compared to the current 4%.  EL and VB |
|
Articles of the same Serie : Consensus
|
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it