Dollar: slowly strengthening

Bank of Japan faces high expectations

Swiss National Bank continues to back its minimum exchange rate


Dollar: slowly strengthening

Our dollar assessment has barely changed. As a consequence of a stronger economic basis in the US, we continue to expect a gradual strengthening throughout the year. From our point of view, problems in the Eurozone are still not solved, as has been illustrated by Cyprus. This weighs on the economy, which is already weak (we have revised our GDP forecast downwards). The ECB has refrained from further action as well, but the weaker the economy, the likely further support measures become. In contrast, the Fed’s purchases seem to be reaching the economy, particularly the housing market, and the improvement on the labor market has accelerated recently. Hence, we continue to expect the dollar to strengthen slowly.


Bank of Japan faces high expectations

Haruhiko Kuroda was appointed the new governor of the Bank of Japan. He took office together with two new deputies (Iwata and Nakaso). Kuroda and Iwata are known as advocates of a looser monetary policy, which aims at overcoming deflationary tendencies in Japan and supporting economic growth. It is generally expected that Kuroda will fully support the political course of Prime Minister Abe and that he will soon announce further measures to loosen monetary policy. Kuroda already announced that he is willing to do everything necessary to achieve the 2% inflation target.
Consequently, expectations are high. According to analysts, words should soon be followed with actions in order to keep the credibility of the BoJ intact and avoid market disappointment. Markets are thus waiting with baited breath for Kuroda’s first Monetary Policy Meeting on April 3/4. Observers assume that monetary policy might already be loosened then, e.g. by front-loading unlimited asset purchases (currently planned starting from 2014).

Since summer 2012, the yen has depreciated by more than 20% vs. the EUR and USD. This process has come to a halt since February, though.
According to analysts, the high expectations of looser monetary policy might cause short-term setbacks (which would weaken the yen). Nevertheless, in the medium run, they expect further slight depreciation of the yen against the USD.


Swiss National Bank continues to back its minimum exchange rate

In the course of its quarterly Monetary Policy Assessment, the Swiss National Bank last week reaffirmed its willingness to defend the lower bound of 1.20 EURCHF. It revised its inflation forecasts further downwards and now expects an inflation rate of 0.2% for 2014, which is at the lower limit of its definition of price stability. In the foreseeable future, there is thus no threat of inflation. This supports the justification for the lower bound of the SNB. According to the National Bank, the global economic situation and sentiment on financial markets remain vulnerable. SNB President Thomas Jordan mentioned that an exit from the minimum exchange rate policy is still ‘far away’. Recent comments from the IMF also underpin the measure. According to Swiss statements, the IMF supports the minimum exchange rate and recommends maintaining it ‘as long as an economic recovery is not firmly underway and inflationary risks are not visible.’

The statements from the SNB and IMF support our view that the downside risks for price stability and economic development in Switzerland are still high. This is also reflected in the recent appreciation of the franc in the course of the Italian elections and the bailout negotiations in Cyprus. There are still risks that, without a lower bound, deepening uncertainty could cause a quick and distinctive franc appreciation. This would imply high economic and deflationary risks for Switzerland. Additionally, the wording of the SNB recently became sharper, making a removal of the lower bound over the course of the year less and less likely. We expect that the SNB will stick to its minimum exchange rate for now and observe further developments. The short-term development of the exchange rate might be driven by progress and regress in the Eurozone. In particular, renewed tensions (e.g. in Italy) could cause an appreciation of the franc in the direction of the lower bound and force the SNB to buy foreign currency again. We expect that the exchange rate will remain close to – albeit above – the lower bound in the medium run.