[B]Weekly Bank Research Center 10-01-07[/B]
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[B] Belated Verbal Intervention from the ECB? [/B]
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[I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]
While EUR/USD has just set a record high, the EUR TWI (trade-weighted index) is nowhere near its record high and, in real terms, is only approaching the level last seen in late 2004, when the Euroland economy was a lot weaker. These observations, coupled with the fact that the ECB seems very focused on containing inflationary risks, suggest to us that the ECB could have a surprising amount of tolerance for a higher EUR/USD. Where EUR/USD goes from here should thus be driven more by policies rather than verbal or actual intervention, we suspect.
Full Story
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[B] How high a EUR/USD? [/B]
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[I] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank [/I]
EUR/USD has risen by eight big figures since mid-August, exceeding previous highs as well our 1.40 target in the process. The rise is well-founded in fundamental developments: US interest rates have fallen sharply relative to its peers, the price of oil and other commodities have risen, stock markets have rebounded and market volatility has declined. Unlike the spike in late 2004, dollar weakness does not yet seem excessive and our short-term models suggest that EUR/USD could rise further before present drivers become exhausted. Accordingly, we raise our forecasts, now targeting a rise in EUR/USD to 1.45. However, we do not expect dollar weakness to continue uninterrupted and now target a decline to 1.35 12 months from now.
[Full Story](http://danskeresearch.danskebank.com/link/Forecastupdateoct07/$file/Forecast_update_oct07.pdf)
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[B] Rate cut expectations have not gone away [/B]
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[/B] [/B] [I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
Expectations about interest rate cuts remain intense in the wake of the rate cut in the US, but the UK and EU-13 economies are showing stronger growth overall than the US and a rate cut as a result of the sub prime crisis therefore seems unlikely. However, interbank rates in the UK and eurozone remain high relative to official short term interest rates, so rate cuts cannot be entirely ruled out if conditions in the real economy took a sudden turn for the worse. There are a few signs that the credit squeeze amongst banks, still so evident in the interbank market, is easing but it remains wide by historical measures, by the order of 3 to 4 times the average in the UK. This translates into a current spread of 55 basis points - 6.3% libor versus 5.75% base rates - compared with the usual 16 or so basis point spread. What will economic indicators due out this week mean for these trends?
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[B] US Review: Another Quarter of Solid Growth [/B]
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[I][I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I] [/I]
Despite all the travails of the financial markets and housing industry, the third quarter appears to have ended on a positive note. We estimate real GDP grew at a 2.8 percent pace during the period and stock prices actually eked out a slight gain during the quarter. In addition, inflation appears to have moderated a bit, although commodity prices have spiked recently. While it may be comforting to look in the rear view mirror and see that we have successfully navigated through a few hairpin turns, significant challenges remain. We doubt the economy will run into a ditch but it is important to note that much of the fallout from the mortgage-market meltdown will not show up in the economic data until the fourth quarter.
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[B] Canadian economy records steady growth [/B]
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[/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
This morning?s release of Canadian gross domestic product (GDP) for July - while falling in on the soft side of market expectations - revealed that the economy continued to churn out steady gains early in the third quarter. The 0.2% month- to-month increase recorded in the month leaves the economy on track to record a respectable rate of growth of 2.5-3% in the third quarter, which is only modestly slower than the 3.5% average outturn clocked in the first half of the year. As has been the case in recent months, the service sector remained the tower of strength, forging ahead by 0.3% on a month-to-month basis in July and counter-balancing another soft performance on the goods side (-0.1%). Since monthly data are notoriously volatile, we?ve provided a snapshot of year-over- year changes across the sub-industries (see chart). As can be seen, the service areas have reigned supreme, while Canada?s export-oriented manufacturing sector has struggled.
[B] [B][B][B] [B] Other Pre-screened Independent Contributors[/B]
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[/B] [/B] [I] J-Chart [/I]
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