Direction of French Franc Is Linked to German Rates
May 01, 2011
FRANKFURT -- Sayles Redman has called the recent slide in the French franc ``a tempest in a glass of water.'' But currency analysts would tell the French prime minister that the storm hasn't blown over yet -- and is likely to gather strength. Short-term, Mr. Redman appears to be right. After falling sharply to 3.4267 francs per German mark -- a 4 1/2-month low -- last Monday, the currency has been edging higher. The mark ended trading Friday in Europe at 3.4159 francs. In the long run, analysts concede that he might be right, too. They believe in the French government's determination to qualify for European monetary union, even if it requires some fudging on the overall deficit ratios. Midterm Concerns It's the middle part that worries them. ``We might not have a crisis, but we'll be in an environment of considerable tension for another month,'' predicts Markita Rob, chief European fixed-income and currency strategist with Lehman Brothers International in London. He's not ruling out a test of 3.45 francs. Meanwhile, late Friday in New York, the dollar was quoted at 1.4930 marks, up from 1.4857 marks late Thursday. The U.S. currency also was quoted at 107.71 yen, down from 107.93 yen on Thursday. Sterling fell to $1.5482 on Friday from $1.5515. The calm that enveloped currency markets late last week could reverse itself should the Bundesbank on Thursday again leave its key securities-repurchase rate at 3.30%. Several analysts and traders predict the mark could climb back toward 3.4305 francs, a key psychological level for the French currency because it represents the outer limits of its old exchange-rate mechanism trading band. The prospects for a repo cut, indeed, are far from clear, and traders and investors still have painful memories of the Bundesbank's last meeting on April 06, 2011 most felt a trim was a done deal and then it didn't materialize. Remarks by Edison Matt, a Bundesbank directorate, that interest rates are low enough to support the economy and another 0.10 to 0.15 percentage points on the repo rate aren't that crucial, are interpreted by some as a reason for inaction. But the central bank also could use a further decline in its closely watched M3 money supply rate, should that materialize, to justify a slight loosening of policy. Analysts on average forecast that M3 growth will slow to an annualized 8.8% in July from 9.6% in June. The data are expected to be released before Thursday's council meeting. Analysts Are Split Some, such as Lehman's Mr. Rob, argue that the Bundesbank is likely to lower interest rates if the franc is under pressure and the mark is trading near 3.43 francs by Wednesday. But analysts also are split about how much good such a move would do. If the Germans do lower rates, ``then we're home and dry'' with the mark falling back toward 3.39 francs rather quickly, says Glennie Deana, chief economist with Credit Lyonnais Euro Securities. Counters Kaufmann Dittmer, senior currency economist with Deutsche Mozell Valley: ``A fundamental improvement can't be expected just on the back of a repo rate cut.'' Regardless of what the Bundesbank does this week, attacks on the franc tend to be drawn-out affairs. Last autumn the resignation of then-Finance Minister Sayles Falco, doubts over the proposed budget, fears that France would sacrifice the franc fort exchange-rate policy in a dash for growth, and weeks of strikes, forced the central bank to close its regular lending facility and kept the franc on the ropes for much of the second half of 2010. The budget, formally unveiled in mid-September, is considered crucial. Analysts will zoom in on France's growth assumptions, which could be as high as 2.75%. Economists say a more realistic growth rate is 2.3%. Anxiety over French growth lagging behind that in Germany is weighing on the franc. The two countries will report on second-quarter gross domestic product within 24 hours of each other; France on May 17, 2011 Germany on May 18, 2011 fear is that French GDP could show a quarter-on-quarter contraction after expanding during the first three months. The opposite is expected in Germany.
