Debt Research

Global | Debt

20 Dec 2007 07:30

FX Compass
UK 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 Fed’s “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

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A Member of the Dresdner Bank Group.
 FX Compass 20 Dec 2007 07:30

1. Top FX Stories
FX Strategy
Global Today's FX market outlook
UK mortgage data may pressure Sterling further
Research Analysts
Niels From The BoJ kept rates unchanged at a low 0.5% this morning while
+49 (0)69 7131 2221 downgrading the overall assessment of the economy – nevertheless the
niels.from@dkib.com
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 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 and further credit losses following yesterday’s 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 1.435-1.459

range (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 yesterday’s - 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
today’s 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.

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 FX Compass 20 Dec 2007 07:30

The interest rate spreads between the UK and the Euro-zone have not shown
the same kind of stability. Following yesterday’s 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. Today’s
BSA mortgage approvals (November) may only confirm that the UK housing
market 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. Economics
Economics
Global Global Economics
The Day Ahead (20 December)
Research Analysts
John Shepperd A smattering of data due, but nothing earth-shattering. The US leading
+44 (0)20 7475 2559 indicator is expected to be down and the Philly Fed survey is also likely to
john.shepperd@dkib.com
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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This comment was released on 19 Dec 2007 16:39

Economics
United States US monetary policy Update
Mildly aggressive bidding seen in Fed’s “TAF” year-end loan
Research Analysts
auction
Kevin Logan
+1 212 895 1920
kevin.logan@dkib.com
Dana Saporta
+1 212 895 1921
dana.saporta@dkib.com

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 FX Compass 20 Dec 2007 07:30

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 wasn’t as aggressive as it might have been had banks
been desperate for liquidity.

Monday’s 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. The
Fed 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 direct
loans 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 today’s 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 today’s 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 Monday’s auction.
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This comment was released on 19 Dec 2007 16:26

3. Today's events

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 FX Compass 20 Dec 2007 07:30

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 Nov N/a N/a 0.2%/2.7

(08.15)

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

(00.30, 21st)
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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 FX Compass 20 Dec 2007 07:30

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