FX Briefing
Highlights
 Growth concerns weigh on dollar
 Beige Book sees modest increase in economic activity
 Central banks in emerging markets scale down rate hike plans
Emerging markets: Central banks are becoming more cautious
This week, EUR-USD firmed again somewhat to
1.30, even touching 1.31 briefly. The euro also
rose slightly against most non-European curren-
cies. The main reason for the movement was the
diverging economic climate: both the macro data
for the euro area and corporate quarterly earnings
made a positive impression, especially against
the gloomy backdrop of the sovereign debt crisis.
The US indicators, on the other hand, underline
the impression that growth has slowed down.
Given the mediocre corporate results, the US
equity market tended to move sideways.
Not all the US economic data painted the same
picture, however: new home sales rose somewhat
in June, after having plummeted the previous
month, and the Case Shiller house price index
showed a continuous upward trend. In contrast,
the Conference Board’s survey revealed a sharp
decline in consumer confidence; particularly the
assessment for the coming months had deterio-
rated significantly. Furthermore, durable goods
orders remained weak, at least the overall total.
Here, things look slightly brighter if defence and
civilian aircraft orders are excluded, as orders for
other goods, particularly capital goods, are still
trending upwards.
Market participants’ expectations or misgivings
about important economic data due to be pub-
lished in the next few days are also likely to be
influencing their view of the economy, however.
The majority are sceptical, even though the fore-
casts, particularly for Q2 GDP, the ISM data and
the labour market, are not pointing to a collapse.
Economics Department Foreign Exchange Trading
+49 69 718-3642 devisenhandel@bhf-bank.com
volkswirtschaft@bhf-bank.com
30 July 2010
At 54.5, for instance, the consensus forecast for
the ISM manufacturing index suggests fairly
widespread expansion; this figure is even consid-
erably higher than the average during the eco-
nomic boom from 2005 to the middle of 2007.
The widely predicted decline in payrolls is pri-
marily due to temporary Census-related hiring
coming to an end. This will probably have cost
nearly 150,000 jobs in July (and presumably
200,000 more in the following two months). In
contrast, employment in the private sector is
likely to have risen by about 100,000. That is not
a lot, compared with 2005 to 2007. But in earlier
upswings, it has also taken about two years for
job growth to gain momentum.
The Fed remains sceptical. The Beige Book
shows a modest increase in activity – on balance,
but not across the board. On the basis of this, the
FOMC statement of 9 August is not likely to be
more positive than the one in June. The president
of the St Louis Fed, James Bullard, remarked that
the US economy was closer than ever before to a
Japanese-style outcome. He said that, should the
economy weaken further, the central bank should
implement additional quantitative easing meas-
ures such as purchases of Treasuries.
Emerging markets: more dovish stance
In the past months, an increasing number of cen-
tral banks from emerging markets as well as
commodity-exporting industrialised countries
such as Canada, Norway, Australia and New
Zealand, had begun to tighten monetary policy.
Matthias Klein
+49 69 718-2175
Matthias Grabbe / Klaus Näfken
+49 69 718-2146 / -2683
Now, however, even these countries seem to be
backtracking again. This week, Brazil’s central
bank only raised the SELIC rate by 50 bp to
10.75% instead of the widely expected 75 bp.
The central bank stated that economic growth
had cooled down to rates which were more in
line with potential growth.
Similar signs emerged from China, in connection
with discussions with the International Monetary
Fund. Chinese officials had apparently said that
fiscal consolidation in the US, Europe and Japan
could have a long-lasting negative effect on
growth in China. Furthermore, as the inflation
outlook had improved, there was less need for
higher nominal interest rates. The Monetary Fund
is expecting inflation in China to decline in the
second half of the year.
The Turkish central bank is exercising more cau-
tion too. In April, it had envisaged starting to
raise interest rates in the fourth quarter. Given the
downward revision of the inflation forecast, it
was announced this week that interest rates
would remain unchanged at 7% for the time be-
ing; they could be raised moderately in 2011.
After Australia and Canada had worded their
interest rate hike intentions more cautiously a
few weeks ago, the Reserve Bank of New Zea-
land followed suit this week. It raised interest
Key indicators and important events
Country Indicator / Event Release
date
US ISM manufacturing / Jul 2.8.
GE Factory orders / Jun 5.8.
EMU ECB interest rate decision 5.8.
UK BOE interest rate decision 5.8.
GE Industrial production / Jun 6.8.
US Labour market / Jul 6.8.
>absol. change unempl. sa
>unemployment rate sa
Economics Department Foreign Exchange Trading
+49 69 718-3642 devisenhandel@bhf-bank.com
volkswirtschaft@bhf-bank.com
rates by 25 bp to 3%, but announced at the same
time that the pace and extent of future rate hikes
would be more moderate than projected in June.
RBNZ governor Alan Bollard said that the
growth outlook had softened, and commodity
prices had moderated, while the NZD was rela-
tively strong.
India’s central bank, which also held discussions
this week, was the only exception. It raised the
reverse repo rate by 50 bp to 4.5%, which was
more than expected, and the repo rate by 25 bp to
5.75%. However, India is a monetary policy ex-
ception, as given an inflation rate of over 14%,
the interest rate level is extremely low, despite
rate hikes in the last few months.
We are expecting central bankers in the emerging
markets to exercise extreme caution as far as
raising interest rates is concerned, while the US
economy remains weak. This reticence is also
aimed at limiting unwanted capital inflows and
avoiding an appreciation of local currencies
against the dollar, which would place an addi-
tional burden on their export activities. If our
assumption is correct, and EUR-USD succeeds in
climbing somewhat in the medium term, the euro
is also likely to remain firm against the commod-
ity and emerging market currencies.
Stephan Rieke +49 69 718-4114
Forecast (in % Prev. period (in Comments
mom/yoy) % mom/yoy)
53.0 56.2
1.5 / 21.4 –0.5 / 24.4
1.00 1.00
0.50 0.50
1.0 / 12.1 2.6 / 12.4
–50k –125k
9.6 9.5
Matthias Klein
+49 69 718-2175
Matthias Grabbe / Klaus Näfken
+49 69 718-2146 / -2683
-2-
Money and foreign exchange market quotations
Spot vs. EUR Change vs. EUR Interbank offered rates
30/07/10 in % week-on-week 1 month 3 months 6 months
EUR – – 0.59 0.83 1.11
USD 1.3000 -0.5 0.31 0.45 0.67
JPY 112.44 0.4 0.16 0.24 0.44
GBP 0.8350 0.3 0.57 0.75 1.03
CHF 1.3516 -0.2 0.13 0.17 0.23
SEK 9.4375 0.1 0.67 0.78 1.00
PLN 4.0053 1.5 3.60 3.86 4.02
CZK 24.801 1.6 1.00 1.17 1.34
CAD 1.3401 0.4 0.85 0.99 1.25
AUD 1.4444 0.3 4.74 4.88 5.11
NZD 1.7946 -0.5 3.20 3.45 3.84
SGD 1.7707 0.2 0.34 0.43 0.61
ZAR 9.5482 0.8 6.78 7.14 7.55

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Economics Department Foreign Exchange Trading Matthias Klein

+49 69 718-3642 devisenhandel@bhf-bank.com +49 69 718-2175
volkswirtschaft@bhf-bank.com Matthias Grabbe / Klaus Näfken
+49 69 718-2146 / -2683
-3-