Dresdner Kleinwort FX Compass 2007-12-20

8/7/2019 Dresdner Kleinwort FX Compass 2007-12-20

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Debt ResearchGlobal | Debt

20 Dec 2007 07:30

FX CompassUK mortgage data may pressure Sterling further

Contents

1. Top FX Stories

Today's FX market outlook - UK mortgage data may pressure Sterling further

2. Economics

Global Economics - The Day Ahead (20 December)

US monetary policy Update - Mildly aggressive bidding seen in Feds TAF year-end loan auction

3. Today's events

4. Look who's talking Central bankers' speeches and other events

5. Daily Charts

Major markets - 24H change

Online research:

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Bloomberg:

DKIB1

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1. Top FX Stories

FX Strategy

Global

Research Analysts

Niels From

+49(0)6971312221

[email protected]

Today's FX market outlookUK mortgage data may pressure Sterling fur ther

The BoJ kept rates unchanged at a low 0.5% this morning while

downgrading the overall assessment of the economy nevertheless the

JPY-funded carry trade has failed to benefit, as the market is concerned

about the global economic outlook. Meanwhile range trading should

continue in EUR/USD despite a possible disappointment in the Philly Fed

index. However, we still see the USD as cyclically weak, and once we enter

2008, EUR/USD could start to move higher once again. BSA mortgage

approvals may confirm that the UK housing market is cooling it is a

matter of time before EUR/GBP reaches the highs at 0.7240 from early

December again.

The BoJ kept rates unchanged at a low 0.5% this morning while downgradingthe overall assessment of the economy nevertheless the JPY-funded carry

trade has failed to benefit, as the market is concerned about the global

economic outlook and further credit losses following yesterdays comments from

Richmond Fed president Lacker that growth will be very weak next year.

Even though the Philly Fed sentiment index could disappoint today

(DKIB/consensus expect 5.0/6.0 in December vs. 8.2 in November), range

trading is likely to dominate EUR/USD, as investors prepare for Christmas and

are reluctant taking on new positions.

Consequently EUR/USD should remain in the lower end of the 1.435-1.459range (levels refer to the 38.2% and the 23.6% Fibonacci retracement levels of

the up-move from 1.336 on August 16 to 1.497 on November 23). Though,

attempts like yesterdays - to push the exchange rate below the 1.435 level

remains likely, although we doubt a lasting break is possible in the absence of

fundamental support.

Despite the USD having enjoyed a recovery during recent weeks, and despite

todays Philly Fed index unlikely to bite on the USD, we maintain the view that it

is only a matter of time before USD weakness returns on the agenda. Once

investors turn more active again after New Year and analyse recent US data, it

will be difficult for them not to conclude that the USD is cyclically weak. The US

housing market is still cooling (NAHB housing index and housing starts were

weak earlier this week) and sentiment is deteriorating (Empire manufacturing on

Monday and probably Philly Fed today). Therefore, the Fed should not be done

cutting rates despite high inflation.

Meanwhile the ECB is hawkish (yesterday Trichet told the European parliament

that the risks to price stability over the medium term are clearly on the upside).

While we expect the ECB to stay on hold at 4% for a prolonged period, the risk

is that it will hike rates should the financial markets stabilise more lastingly.

Although the EU13-US interest rate spreads have stabilised during this week

(2Y swap spread has been stable at 58bp), the risk is that they will start to widen

again, providing EUR/USD with renewed support.

FX Compass 20 Dec 2007 07:30

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The interest rate spreads between the UK and the Euro-zone have not shown

the same kind of stability. Following yesterdays MPC minutes from the

December meeting (where rates were reduced 25bp to 5.5%) the 2Y UK-EU13

swap spread narrowed to 78.6bp from 84.1bp. In itself the 9-0 vote for cutting

rates in December the first unanimous decision to cut rates since 2001

indicates that the probability for another easing in early 2008 is high. Todays

BSA mortgage approvals (November) may only confirm that the UK housingmarket is cooling, thereby adding to the arguments for further rate cuts. In

general we therefore believe that the GBP will stay pressured, and it may only

be a matter of time before the high from December 5 at 0.7240 is reached again

in EUR/GBP.

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This comment was released on 20 Dec 2007 07:28

2. EconomicsEconomics

Global

Research Analysts

John Shepperd

+44(0)2074752559

[email protected]

Global EconomicsThe Day Ahead (20 December)

A smattering of data due, but nothing earth-shattering. The US leading

indicator is expected to be down and the Philly Fed survey is also likely to

be weaker.

The UK money supply data for November are expected to continue to be robust,

given that overdraft finance remains on tap.

The German IFO was weaker than expected and that may point the way for

other business surveys out this week - expect the Belgian leading indicator to be

down.

Seven of the ten components of the US leading indicator worsened in November

- so no surprise that we expect a sharp drop.

The expectation was that the Philly Fed survey would be heading lower, but the

larger-than-forecast drop in the New York Fed survey out on Monday suggests

downside risk.

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Economics

United States

Research Analysts

Kevin Logan

+12128951920

[email protected]

Dana Saporta

+12128951921

[email protected]

US monetary policy UpdateMildly aggressive bidding seen in Feds TAF year-end loan

auction


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The Federal Reserve this morning announced the results of its initial Term

Auction Facility (TAF), conducted this past Monday. The results suggested

there is still strong demand in the banking system for year-end liquidity,

but the bidding wasnt as aggressive as it might have been had banks

been desperate for liquidity.

Mondays auction for 28-day loans was conducted as a Dutch auction, meaning

that all successful bidders pay the lowest accepted rate the stop-out rate. TheFed announced that the stop-out rate was 4.65%, which falls in the high end of

the range between the minimum rate set for this auction (4.17%) and the rate at

which banks can borrow from the discount window (4.75%).

The bid/cover ratio was 3.08. There were $61.6bn in bids for the $20bn in loans

offered. There were 93 bidders in this auction. Bidding was mildly aggressive, as

the stop-out rate came in well above the 4.17% minimum. If the bidding had

been very aggressive, the stop-out rate could have been well above the 4.75%

disc rate.

The fact that there were 93 separate institutions bidding in the auction suggests

that there was no stigma associated with this facility as there is with directloans from the discount window. With direct loans, a bank has to approach the

Fed to borrow and in the process is admitting that it has difficulty in obtaining

funding. In the TAF program, the bidders are part of a large group that is taking

advantage of an offer that the Fed wants them to take up.

With a stop-out rate of 4.65%, the institutions participating in the auction were

able to get a 28-day loan at a rate well below todays one-month Libor rate of

4.93%. The fact that the TAF stop-out rate was below the discount rate suggests

that banks were not so desperate for funding that they had to bid over the

discount rate to ensure that they would get the liquidity. This result led to a small

sell-off in the Treasury market as the safe-haven bid for Treasuries faded a bit.Indeed, the fact that banks have been able to get some liquidity at 4.65% over

the turn of the year may bring Libor rates down slightly as we approach year

end.

The Fed will conduct another TAF auction tomorrow. The auction could be as

much as $20bn, depending on the level of demand. In view of todays results

(with 93 separate bidders, a 3.1 bid/cover ratio, and an attractive stop-out rate),

it is likely that the Fed will auction off the full $20bn tomorrow, but at a rate that

may be somewhat below the 4.65% stop-out on Mondays auction.

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3. Today's events


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Release (BST) Period DrK Median Last

Germany GfK Consumer Confidence (07.00) Jan 4.6 4.1 4.3

Switzer Trade Balance (08.15) Nov N/a N/a 1.56bn

Producer & Import Prices MoM/YoY

(08.15)

Nov N/a N/a 0.2%/2.7

Italy Consumer Confidence (08.30) Dec 106.5 107.2 107.6

Norway Unemployment Rate (09.00) Dec N/a 1.6% 1.6%

UK PSNCR (09.30) Nov 7.0bn 8.0bn -4.8bn

GDP QoQ/YoY (09.30) 3Q F N/a 0.7%/3.2% 0.7%/3.2%

M4 Money Supply (09.30) Nov 0.6% (11.8% YoY) 0.4% (11.6% YoY) 0.2% (11.8% YoY)

Belgium Leading Indicator (14.00) Dec 0.8 1.0 1.4

US Initial Jobless Claims (13.30) Dec 15 333k

US GDP/Prices - Ann. (F) (13.30) Q3 4.9%/0.9% 4.9%/0.9% 4.9%/0.9%

Chicago Fed NAI - Index/3m Ave (13.30) Nov -0.50/-0.51 -0.73/-0.56

Leading Indicators (15.00) Nov -0.5% -0.2% -0.5%

Philly Fed Survey (17.00) Dec 5.0 7.0 8.2

New Zea GDP QoQ/YoY (21.45) 3Q N/a 0.4%/3.2% 0.7%/3.2%

Australia Conference Board Leading Index (23.00) Oct N/a N/a 0.5%

New Motor Vehicle Sales MoM/YoY

(00.30, 21st)

Nov N/a N/a 1.1%/8.9%

Source: Bloomberg, Reuters

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4. Look who's talking

Central bankers' speeches and other events

Time (BST) Speaker/Event Details

16:00 Fed's Rosengren Introduce bank agreement on mortgage fund

Source: Company data, Dresdner Kleinwort Research

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5. Daily Charts

Major markets - 24H change

Source: Dresdner Kleinwort Research


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Dresdner Kleinwort FX Compass 2007-12-20

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