EURJPY – yen weakens in the short term

EURUSD – temporary strengthening of dollar most likely

EURJPY – yen weakens in the short term

EURCHF – no significant weakening of the franc expected at present

USD – dollar firming, major risks to the outlook

At the end of April EURUSD moved out of a trading range that had previously held for roughly two months, and the euro strengthened. The move wasn't especially strong, and since the beginning of May, EURUSD is leveling out around the 1.12 level. The reasons for the strengthening of the common currency aren't clearly discernible. The markets regarded the changes to the Greek negotiating team as a positive step toward a solution. Stronger economic data in the euro zone and rather disappointing data releases in the US probably contributed to some squaring of positions against the euro as well. The outlook for EURUSD is currently characterized by especially high risks. The Federal Reserve hasn't committed itself to a clear course of action yet, instead the FOMC will decide whether to hike rates on a case-by-case basis depending on incoming data, which could be reflected in relatively short-lived moves in EURUSD. We expect the first rate hike to be implemented in September and are looking for the dollar to strengthen ahead of it. However, a stronger than expected economic recovery in the euro area could foil this move toward parity. Nevertheless, our base case scenario remains a relatively moderate firming of the dollar toward parity, which should however prove to be short-lived.

JPY – yen weakens in the short term

In 2014, Japan's economy has disappointed with zero growth. Preliminary indicators are sending mixed signals for the 1st quarter of 2015. Consumer confidence has slightly improved relative to the 4th quarter average, and currently indicates slight growth in consumer demand. The manufacturing PMI has on average slightly declined in the 1st quarter of 2015, and overall points at best to minor growth in industrial production. Thus no big jump in Japan's economic growth is to be expected in the 1st quarter of 2015.

Inflation has moderately increased in March (2.2% after 2.0% previously). Adjusted for the effects of the sales tax hike in April last year, the Bank of Japan estimates that the inflation rate remains at a mere 1%. The BoJ expects that the inflation rate adjusted for the effects of the sales tax hike will reach approx. 2% in the course of 2015. At the most recent meeting in April, a clear majority of the BoJ's board has voted in favor of continuing the asset purchase program at an unchanged pace (JPY 80 trn. p.a.).

Over recent trading weeks, the yen has weakened somewhat against the euro (a move from 130 to 134). This move occurred essentially in concert with a significant rise in euro zone bond yields. For coming developments in the exchange rate, both monetary policy (both the ECB and the BoJ are currently engaged in quantitative easing) as well as the levels of yields in both currency areas will be decisive. The recent rise in euro area bond yields has increased the euro's attractiveness in this respect, while the faster pace of the ECB's securities purchases compared to the BoJ in principle argues against euro strength. From a technical perspective, EURJPY continues to trade slightly below the moderately declining 200 day moving average. This points to continued firming of the yen vs. the euro. The analyst consensus currently expects the cross to stabilize at a level of approx. EURJPY 130 in the course of 2015.

EURCHF – no significant weakening of the franc expected at present

In its attempt to make the Swiss franc less attractive for investors, the SNB concluded its review of exemptions on April 22 and significantly reduced the circle of sight deposit account holders not exposed to negative interest rates. In the future, only the sight deposit accounts of the central federal administration and the compensation funds for old age and survivors’ insurance, disability insurance and the fund for loss of earned income will not be subject to negative interest rates. Following the announcement, the Swiss franc weakened from 1.025 francs per euro to 1.04 and in the subsequent week to 1.05 francs per euro. Since the end of April, EURCHF has been oscillating between EURCHF 1.035 and 1.045. In his speech at the SNB's shareholder meeting at the end of April, SNB president Thomas Jordan once again insisted that the Swiss franc remains overvalued. However, he also warned of the possibility of a temporary upward revaluation due to the heightened uncertainty surrounding Greece.

We concur with the SNB's opinion that unresolved situation with Greece's debt has a supportive effect on the Swiss franc in the short term. Moreover, distinctly growing deposits, despite the negative interest rate, and the recently widening inflation differential between Switzerland and the euro zone provide an upward pressure on the Swiss franc in the short term. Actual developments will inter alia depend on whether the steps taken by the SNB to combat safe haven flows into the Swiss currency will prove sufficient. For the moment, our forecast for the EURCHF remains in a range between 1.05 – 1.10 in the second quarter of 2015 and we expect the Swiss franc to weaken somewhat by year-end. However, there is no longer a minimum exchange rate. Should certain risks materialize (such as geopolitical risks or turmoil in the euro zone) a rapid and strong upward move in the Swiss franc could once again be in the offing.