• US Treasuries surge higher as financial world is in distress
  Distress in the credit markets and slumping equities are pushing Treasuries higher as safe haven motive entice more buyers. In such climate, the 2-year government yield is falling like a stone with the 2003 lows coming on the radar. Let’s hope the payrolls report don’t exacerbate the woes. It seems markets are rapidly moving to another climatic moment.
• Is the ECB falling behind the curve?
  Both the Bank of England and the ECB held rates as expected unchanged yesterday. The ECB press conference signaled the ECB is not yet considering an early rate cut. This resulted in a flattening of the yield curve, as the long end of the curve still tracked US yields lower. Fears rise that the ECB is falling behind the curve.
• EUR/USD extends record race
  Over the last 24 hours EUR/USD again set new all-time highs as Trichet didn’t give any strong indication that the ECB is going to change course anytime soon. After a brief correction on Wednesday, USD/JPY turned also south again. Key support levels and even the psychological barrier of USD/JPY 100 come within reach.

The Sunrise Headlines

• US equities sold off (-1.75%-to-2.30%) on credit woes and equity indices look now well on their way to re-test the January lows, a critical test
• Asian equities sharply lower on credit woes (banking sector), surging crude and a falling dollar
• Liquidity spreads, especially in the UK and US, are again moving sharply higher as next phase in credit turmoil is going to a climax.
• Thornburg mortgage, specialized in US jumbo loans, said it failed to meet margin call, raising bankruptcy fears. Carlyle affiliate, a private equity group, misses some margin calls and received a notice of default.
• Fannie Mae & Freddie Mac remains under severe pressure. Peloton hedge fund is seen liquidation its assets as it shuts down its activities. Citigroup announced a restructuring of its mortgage business including reducing exposure by 45 bn. $.
• Dollar falls to all-time low on a trade weighted basis
• Commodities take a pause after a breathtaking rally, but crude steams ahead trading now above 105 $/barrel.
• BOJ keeps rates unchanged, Muto next BOJ governor?

Currencies: EUR/USD Extends Record Race

Yesterday, EUR/USD extended its rally as the ECB rate decision and press conference didn’t change anything. On the contrary. EUR/USD already set new all-time highs in the run-up to the ECB press conference and this move was only reinforced during the press meeting. In its prepared remarks, Trichet didn’t even mention (the strength of) the euro. When the item was raised in the Q&A session he didn’t go any further than referring to the official US remarks that a strong dollar is in the interest of the US; nothing about brutal moves or valuations that are not in line with fundamentals.

Together with the ECB signaling that inflation might stay above target even going into 2009, this only reinforced the feeling that the euro will continue to enjoy strong interest rate support. Of course, it’s impossible for the ECB to signal that inflation is too high and the European economy is still reasonably strong on the one hand and indicate that EUR/USD is not moving according to the fundamentals on the other hand. So, regarding the strength of the euro, the ECB is with its back against the wall and the growing uncertainty on the economic and financial developments in the US only reinforces this unattractive situation. So, one shouldn’t be surprised that markets drew their conclusions, sending EUR/USD to new all-time highs. EUR/USD sets more new all-time highs above 1.54 at the moment of writing.

Today, the next high profile event is on the calendar with the US payrolls. The market expects a moderate rise in jobs (23K) after the unexpectedly low -17K of the previous month. We don’t have strong arguments to distance ourselves from consensus. From a market point of view, we take the same approach as yesterday going into the ECB meeting. There is probably a very positive surprise needed to change the sentiment in favour of the dollar, especially given the growing stress in the US financial system and the negative financial and economic headlines. On the other hand, a poor payrolls figure contains the risk of the USD-decline to become ever more disorderly, we fear.

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EUR/USD: another day, another all-time high

Short-term the pair remains in overbought territory.

Support is seen at 1.5333/ (Break-up hourly/daily envelop), at 1.5293 (STMA), at 1.5239 (Break-up hourly), at 1.5145/42 (Week low/Break-up), at 1.5087 (MTMA).

Resistance is seen at 1.5406 (St Reaction high) at 1.5451 (daily envelope), at 1.5482 (2nd target triple bottom) and at 1.5536 (Last target triple bottom).

USD/JPY

Longer-term, we have a dollar negative bias.

In a day-to-day perspective and with the payrolls on the agenda, a correction is always possible, but as indicated above the risks remains asymmetrical towards more dollar weakness. Indeed, the market positioning probably becomes ever more unidirectionally dollar negative and that is a risk factor over time. However, we don’t have the feeling yet that we already reached an exhaustion move that is needed to trigger a more pronounced counter move.

Looking at the graphs, in a longer term perspective, the EUR/USD picture was already euro constructive and the break above the 1.4968/1.50 only opens the way for further euro gains. We continue to feel confirmed in our long-standing buy-ondips approach. The short-term picture remains positive as long as the pair holds above the MTMA (1.5087). A correction below could signal that the euro rally shifts into a lower gear.

After a stock-market driven upward correction on Wednesday, USD/JPY yesterday again joined the broader USD decline. The combination of ongoing uncertainty on the fate of the US economy, rising financial market stress (cf. rising liquidity spreads in the US) and a sharp decline in stock markets worldwide caused USD/JPY to retest the Monday lows yesterday evening and this test is still ongoing this morning.

This morning, the BOJ as expected left rates unchanged. In its assessment the BOJ was slightly more cautious on the economy. The Japanese economy is seen expanding moderately but growth slows for the time being. The government put forward Mr. Toshiro Muto as the next governor of the BOJ.

Until early last week, the USD/JPY trading clearly lacked momentum. However, the technical break below the 106.70-area, overall dollar weakness and a flaring up of global risk aversion hammered the pair to new cycle lows. As key technical levels are coming with striking distance (101.22 is 1999 low), one might expect Japanese officials try to slow the ascent of the yen. However, we don’t have the feeling that we’re already at that point of decisive action yet. So, the room for a sustainable rise in USD/JPY looks limited after all. This is and remains a sell USD/JPY into up-ticks market.

USD/JPY: Key support levels come in the picture

The pair is still in oversold territory.

Support is seen at 102.45 (Reaction low), at 102.12/02 (Boll bottom/Daily envelope), at 101.67 (2005 low), at 101.22 (1999 low) and at 100 (Psycho).

Resistance comes in at 103.18/24 (ST high/daily envelop), at 103.56 (Reaction high), at 104.20/36 (Week high/previous reaction high) 104.95(Previous reaction low/envelop weekly), at 105.33 (MTMA)

EUR/GBP

Over the previous sessions, EUR/GBP held close to the recent highs and this trading pattern was more or less confirmed yesterday. The pair again set a new minor high at 0.7693, but gave up some of the earlier gains on the BOE decision to leave rates unchanged. So even if this was largely expected, it still was seen as a good excuse to cash in some profits on EUR/GBP longs. Also, EUR/GBP currently doesn’t fully join the EUR/USD record race suggesting that the market apparently needs some time to digest recent sterling loss. However, with financial tensions rising (also in the sterling markets) and all indicators pointing to a new spike in investor risk aversion, we don’t see much room for a sustained sterling rebound. So, more pronounced corrections still are seen as an opportunity to sell the sterling.

Today, the UK calendar is empty.

On the graphs, EUR/GBP set a corrective bottom at the end of January which was confirmed mid February. A first attempt to break the top of the sideways range failed early February, but succeeded late February and this break was an additional sign that sterling is very vulnerable both to the negative headlines from the financial sector and to fears of a pronounced slowing in UK growth. The recent developments only confirm that sterling will face a difficult environment further out in 2008. Shortterm corrections on overbought conditions are always possible, but the trend is obvious and there is no reason at all to row against this ever stronger sterling negative tide. Any downward corrections in EUR/GBP, if they were to, occur, are opportunities to sell the sterling. The previous highs in the 0.7580 area already should give decent support in this pair.

EUR/GBP: sterling sell-off cools, but for how long?

The pair is overbought territory.

Support is seen at 0.7635 (St low), at 0.7531/24 (Daily envelop + Week low/reaction low), at 0.7610/06 (MTMA/MT break-up) and at 0.7680 (Weekly envelop).

Resistance comes in at 0.7680/93 Daily envelope/Reaction high), at 0.7697/99 (Second target double bottom/irr B) and at 0.7706/13 (Target triangle break/Weekly envelope) and at 0.7728 (Boll top).

News

US: Initial claims drop slightly more than expected

Pending Home sales stabilized in January, but were down by 19.6% Y/Y. The outcome was stronger than the 1% M/M decline expected and one may very tentatively think that some stabilization is occurring. However, the situation is still far from clear.

Mortgage delinquencies and foreclosures increased in Q4 of 2007 for almost all types of loans and paint a downbeat picture of the situation. There was only one silver lining: the pace of increase slowed somewhat.

Initial claims fell 24 000 to 351 000 after spiking to 375 000 in the previous week. Despite the decline, the trend in claims is clearly up, suggesting a softening in the labour market. Continuing claims rose 29 000 to 2 831 000, the highest since the summer of 2005

EMU: German factory orders fall for second month

In Germany, the factory orders fell for the second consecutive month in January by -1.5% M/M following a slightly upwardly revised -1.1% M/M in February. Orders for intermediate (1.2% M/M), capital (-1.8%) and consumer goods (-0.6%) all declined. The annual growth in orders however rebounded from 6.2% Y/Y to 9.5% Y/Y signalling no abrupt fall in the industrial sector, although the momentum is slowing.

Others: UK house price growth slows

In February, the Halifax house price index declined 0.3% M/M following a flat reading in January. As a result, annual house price inflation slowed from 4.5% Y/Y in January to 4.2% in February. Recently, several MPC members have already warned that the slowdown in the housing sector poses a serious threat to the consumption outlook. Yesterday, the Bank of England however left rates unchanged at 5.25%.

Download entire Sunrise Market Commentary

Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

(English translation prepared by the Bank’s staff based on the Japanese original)

1 This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on March 6 and 7, 2008.

2 The text of "The Bank’s View" was decided by the Policy Board at the Monetary Policy Meeting held on March 6 and 7, 2008.

March 7, 2008

Bank of Japan

Japan’s economy is expanding moderately as a trend, although the pace of growth has been slowing mainly due to the drop in housing investment and the effects of high energy and materials prices.

Exports have continued to increase. Business fixed investment has also continued to trend upward, as corporate profits have remained high although they are leveling off. Private consumption has been firm in a situation where household income has continued rising moderately. Meanwhile, public investment has been sluggish. Housing investment has remained at a low level, although there have been signs of recovery. With these developments in demand both at home and abroad, production has been more or less flat lately, partly in reaction to the relatively large increase in the second half of last year.

Japan’s economy is expected to continue expanding moderately, although the pace of growth is likely to slow for the time being.

Exports are expected to continue rising, as overseas economies are likely to expand although at a slower pace. Business fixed investment and private consumption are likely to follow an uptrend against the background of generally high corporate profits and the moderate rise in household income. Housing investment is expected to recover gradually, although it is likely to remain sluggish for the time being. In light of these developments in demand both at home and abroad, production is expected to increase, after being more or less flat in the short run. Public investment, meanwhile, is projected to be on a downtrend. Due attention should continue to be paid to factors such as uncertainties regarding future developments in overseas economies and global financial markets, as well as the effects of high energy and materials prices.

On the price front, the three-month rate of change in domestic corporate goods prices has been positive, mainly due to the rise in international commodity prices. The year-on-year rate of increase in consumer prices (excluding fresh food) has been rising since around the end of last year, due to the increase in prices of petroleum products and food products. Domestic corporate goods prices are likely to continue increasing for the time being, primarily reflecting the rise in international commodity prices. The year-on-year rate of change in consumer prices is projected to follow a positive trend due to the rise in prices of petroleum products and food products in the short run and the positive output gap in the longer run.

As for the financial environment, the environment for corporate finance is accommodative. Credit demand in the private sector has been more or less flat. The issuing environment for CP and corporate bonds has been favorable as a whole, although issuance spreads on those issued by firms with low credit ratings have expanded slightly. Lending attitudes of private banks have continued to be accommodative. Under these circumstances, the amount outstanding of lending by private banks has been increasing moderately, and the amount outstanding of CP and corporate bonds issued has been above the previous year’s level. Funding costs for firms have been more or less unchanged. Meanwhile, the year-on-year rate of change in the money stock is around 2 percent. As for developments in financial markets, in the money markets, the overnight call rate has been at around 0.5 percent, and interest rates on term instruments have been around the same level as last month. In the foreign exchange and capital markets, the yen has appreciated against the U.S. dollar compared with last month, while long-term interest rates and stock prices have fallen compared with last month.

Source

The BOJ policy board voted unanimously to keep interest rates at 0.50% today. The move was widely expected by the markets.

The larger story is Toshihiko Fukui himself, for whom this was the last policy meeting as the bank’s Governor. Until recently, Fukui’s deputy Toshiro Muto was the leading candidate. However, Muto now faces stiff opposition from the Democratic Party of Japan (DPJ) that controls the upper house of the Diet (Japan’s parliament) and is able to block the nomination. They allege that Muto’s 37 years with the Ministry of Finance far outweigh his 5 years with the BOJ, questioning whether the central bank can truly retail its independence under his leadership.

Whoever steps into Fukui’s role on March 19th will have their work cut out for them - Japan faces mounting risks to growth as slowing US demand and a stronger yen erode export growth. Japan’s consumers are famously reluctant to up their spending in response to a lowering in borrowing costs, and at current rates there is not much room to ease in any case.

On balance, Chinese demand has been unwavering, keeping Japan afloat as the US slows. While much remains uncertain, we can surely expect a good amount of yen volatility before a clear direction can be seen.

DailyFX

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USD/JPY Ratio: 1.96
Signal: Bearish

Currency Last Week Present* % Long % Change in Positions Outstanding Signal USD/JPY 2.18 1.96 66% 22.18% Bearish

USDJPY – Few retail traders were evidently convinced by the USDJPY’s break below 105 and the push to fresh multi-year lows that the move brought along with it. The SSI ratio for USDJPY stands at 1.96, down from the more extreme 2.18 reading last week that built up expectations of the eventual breakdown. The details reveal that was just as significant an increase in traders trying to call a bottom on this downdraft as those joining the trend. Short positions rose 5.0% from Wednesday and 13.2% from last week. Long positions are only 0.2% higher than yesterday but 27.3% greater than they were last Thursday. Overall, open interest is up 1.5% from yesterday and is 30.2% above its monthly average. As the SSI is a contrarian indicator, the net positive position signals further USDJPY losses.

The dollar fell to a new all-time low versus the euro and Swiss franc and rose above $2 against the pound after the European Central Bank and the Bank of England left their benchmark interest rates unchanged. Risk aversion increased after US home foreclosures rose to a record and loan defaults by Thornburg Mortgage Inc. and a Carlyle Group bond fund spurred concern that the credit crisis is deepening. The increased risk aversion strengthened the yen. The Canadian dollar was modestly lower. The Australian dollar fell on carry-trade unwinding and weak commodity prices.

The EUR/USD rose to a new all-time high following ECB President Jean-Claude Trichet’s hawkish tone that there is strong upward pressure on inflation and the ECB mandate is price stability. He seemed to signal the ECB is in no hurry to cut interest rates. Growth and interest differentials favor the euro. The EUR/USD’s momentum remains strong, likely to attract more momentum traders despite its overbought condition. US employment report tomorrow is expected to be weak, unlikely to change the pair’s direction.

Financial and Economic News and Comments

US & Canada

US mortgage foreclosures rose to 0.83% in Q4, the highest ever, from 0.54% a year earlier, the Mortgage Bankers Association said. The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.82%, the highest since 1985.

US pending home sales were unchanged in January, the National Association of Realtors reported. The index of signed purchase agreements held at 85.9, 20.0% below the level a year earlier.

US initial jobless claims declined larger than expected by 24,000 to 351,000 in the week that ended March 1, the lowest level since the week of January 19, the Labor Department said. The four-week moving average of initial claims fell to 359,500, from 361,000. The number of people continuing to collect unemployment benefits rose to 2.831 million in the week that ended February 23, from 2.802 million the prior week.

Europe

The European Central Bank kept its benchmark interest rate at 4.0%, as expected. The ECB revised up its inflation forecasts to 2.9% from 2.5% for 2008 and said inflation will stay above the 2% ceiling in 2009. The ECB also cut its growth forecasts to 1.7% for 2008 and 1.8% for 2009, compared with its December forecasts of 2.0% and 2.1%.

The Bank of England kept its benchmark interest rate unchanged at 5.25%, as expected.

ECB President Jean-Claude Trichet said the interest rate decision was unanimous and policy makers are focused on keeping expectations about future price increases in check. “The firm anchoring of medium- to long-term inflation expectations is of the highest priority to the Governing Council,” Trichet said. Uncertainty resulting from financial turmoil remains high but the economic fundamentals are sound, he said.

Asia-Pacific

Australia’s trade deficit widened to A$2.72 billion ($2.5 billion) in January from a revised A$1.94 billion in December, the Bureau of Statistics reported. Imports rose 5% m/m in January. Exports increased 2% m/m in January to A$19 billion.

Australia’s home-building approvals rose a less-than-forecast 1.9% m/m in January, following a 11.9% m/m decline in December, the Bureau of Statistics said.

FX Strategy Update

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com

©C2004-2005 Globicus International, Inc. and Capital Market Services, L.L.C. Any information in this report is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Capital Market Services, L.L.C. with regard to the accuracy of the data. The opinions and estimates contained herein constitute our best judgment at this date and time, and are subject to change without notice. Capital Market Services, L.L.C. accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this report. No part of this report may be reproduced or distributed in any manner without the permission of Capital Market Services, L.L.C.

• ECB suggests it is not planning to change policy anytime soon
• Worries about inflation and easing of growth fears mean Trichet sounds less dovish than a month ago
• We still expect rates to fall by 75 basis points by end year
• Soaring Euro, impact of weak US economy and strains in Spain and Italy will force the ECB’s hand
• We now expect first rate cut in June but wouldn’t rule out earlier move if financial conditions deteriorate or activity data disappoint

The European Central Bank kept its key policy rate unchanged at 4.00% for the ninth successive month. Mr. Trichet, the ECB President, used his regular monthly press conference to suggest that the ECB does not intend to alter policy anytime in the near future. In this regard, his main purpose was to deflate market hopes for any near term cut in interest rates.

Mr. Trichet emphasised that the ECB’s focus remains firmly on retaining price stability. Eurozone inflation remained at the record level of 3.2% for a second month in February, some considerable distance above the ECB’s target. So, it will take compelling evidence of a sharp deterioration in Eurozone economic conditions (that would bear down on inflation) before the ECB feels sufficiently comfortable to contemplate reducing rates.

In the wake of Mr. Trichet’s comments today, financial markets take the view that circumstances should change sufficiently to allow the ECB cut rates once in the Summer and probably two more times before end year. We believe that clearer evidence of a sharp weakening of activity and an associated improvement in the inflation outlook should materialise in the next couple of months. As a result, we think the ECB might be forced to cut rates somewhat earlier than the market now envisages. Our expectation that notably poorer economic conditions will develop in the next few months also implies the ECB may have to cut rates as many as three times by the end of the year.

What Trichet said

Probably the key change in the tone of today’s press conference from a month ago was that Mr. Trichet made a determined effort to downplay concerns that the Euro area economy is set to experience a marked deterioration of the sort now being suffered by its US counterpart. In this regard, the first paragraph of today’s press statement no longer includes any reference to ‘downside risks’ to economic activity. Instead it simply reiterates that ‘the fundamentals of the Euro area are sound’ - presumably in an attempt to emphasize the contrast with problems in the housing market and balance of payments of the US. It goes on to say that ‘incoming macroeconomic data point to moderating but ongoing real GDP growth’. Again, the tone of this sentence is markedly different, and intentionally so, to yesterday’s Federal Reserve Beige Book which indicated that (US) ‘… economic growth has slowed since the beginning of the year. Two thirds of the Districts cited softening or weakening in the pace of business activity, while the others referred to subdued, slow or modest growth.’ Mr. Trichet spoke of ‘different Central Banks in different universes’. Clearly, the ECB and Fed are oceans apart in their assessment of current conditions in their respective economies. To an extent this reflects a significant difference in the scale of downturn in economic conditions between the two zones. However, it also underscores a difference in policy signals. The Fed is emphasising the process of reducing US official rates will continue at its March 18th policy meeting (with a further substantial cut, probably of 50 basis points). The ECB sought to emphasise today that it is not ready to contemplate beginning the process of reducing interest rates in the Euro area.

The subtle but very important shift in the tone of today’s press conference likely reflects the influence of two factors. First of all, Eurozone inflation has remained stubbornly high of late and the combination of record commodity prices and a worrying German wage round have increased the likelihood that inflation will remain higher for longer than expected. Second, the ECB were probably heartened by signs of resilience in a range of Euro area indicators in the past month. At the margin, the risk of a possibly severe slowdown that was suggested by Euro area purchasing managers data for January and the information coming from the US in early February may have caused some at the ECB to fear an imminent and pronounced deterioration in economic conditions a month ago. However, in the interim, a significant rebound in February PMI services data set alongside resilient readings from the IFO and a number of other surveys probably materially lessened such fears. Although the ECB still acknowledges that risks to activity lie to the downside, this threat appears far less immediate than a month ago.

What do new ECB projections tell us?

The ECB has reduced its forecasts for economic growth and raised its forecasts for inflation both for 2008 and 2009. Inflation is now seen sharply higher at 2.9% in 2008 (previously 2.5%) and somewhat higher in 2009 at 2.1% rather than 1.8%. While the upward revision to the 2009 projection is slightly larger, the rise in the 2009 estimate is more significant. First of all, it implies the ECB sees no significant unwinding of inflation next year even as a result of favourable base effects. Second, the fact that the 2009 outturn remains above the ECB’s definition of price stability to the end of the (published) policy horizon emphasises that in the ECB’s judgement inflation risks remain to the upside. Of course, it should be emphasised that today’s projections effectively assume that the ECB cuts its policy interest rate to 3.25%. So, the ECB’s projection that inflation would remain above target in such circumstances is consistent with the ECB’s view that cutting interest rates sharply in coming months would not be appropriate. In this sense, the projection is a technical representation of Mr. Trichet’s comments today that ‘we do not underwrite future market interest rates.’ That said, he stopped some distance short of rubbishing market expectations entirely by adding that the ECB never precommits. It should also be noted that if lower interest rates mean inflation might be higher than the ECB would want, a failure to cut rates also means economic growth would be lower than today’s ECB projections envisage.

Although today’s projections underscore the ECB’s reluctance to countenance early rate cuts, the reality is that circumstances are changing rapidly and in a manner that makes projections outdated very quickly. In this regard, the ECB projections assume the Euro will average $1.47 in 2008 and $1.46 in 2009. They also assume oil prices will average $90.6 and $89.1 in these two years given how dated these now appear. So, it would be very surprising if the assumptions underlying today’s projections remain valid for any length of time.

We continue to expect lower interest rates

In summary, today’s ECB press conference should be seen as a determined effort to prevent excessive hopes for an early cut in interest rates. We reckon stubbornly high inflation and less activity troubling data in the past month have made the ECB more resistant to any notion of an early easing in policy. However, the reality is that Central Banks rarely if ever prepare a ‘glide path’ when the interest rate cycle is about to turn downwards. The statement the US Federal Reserve released after its August 7th meeting last year warned that the Fed’s ‘predominant policy concern remains the risk that inflation will fail to moderate as expected’. Within a very short time its words and actions emphasised a very different agenda. We don’t think the ECB wants to cut rates now and we don’t think it envisages cutting anytime soon but our long-term characterisation has always been of ‘a bumpy path to lower rates’ in the Euro area.

In spite of the apparent resilience in some recent indicators, we think a trend towards markedly weaker economic growth in the Euro area is now becoming established. A recent worsening in financial market conditions will add to these pressures. We also note the particular strength of the Euro on FX markets and the rather lame reliance by Mr. Trichet on empty utterances from US policymakers that they favour a ’strong’ Dollar. In reality, the authorities in Washington are glad of the support a declining currency gives to American exports. So, provided there is no adverse feedback from a weaker currency to the price of US assets, a policy of ‘polite’ neglect towards the Dollar will persist. However, the impact of the Euro regularly breaching record highs against the Dollar and Sterling should quickly become painful for Eurozone companies that export or compete with imports. Finally, we think signs of particular strains in the economies of Spain and Italy that together account for around 30% of the Eurozone economy will lead to a clear weakening in Euro area activity in coming months.

Because we also see Eurozone inflation easing clearly from March, we expect the ECB will cut rates by June. However, it is not too difficult to envisage circumstances in which the ECB could be forced to cut somewhat sooner if financial market conditions continue to deteriorate and/or economic indicators confirm a notably poorer trend than the ECB now anticipates. Reflecting our more pessimistic view on the outlook for activity, we also feel the ECB may be compelled to cut rates by as much as 75 basis points by end year.

Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.