EURJPY – Strengthening, according to decline in Bund yields

EURUSD – Interest rate expectations for the US will be decisive

EURJPY – Strengthening, according to decline in Bund yields

EURCHF – Tensions in euro zone are keeping Swiss franc firm

Upcoming US labor market data in focus

The dollar strengthened somewhat vs. the euro in the course of July. During the previous months, the pair had traded in a range between 1.1 and 1.14; most recently, the pair remained close to 1.1, even declining briefly to just slightly above 1.08, a low since April. Going forward, the crucial determinant will be the interest rate expectation for the US. Most recent comments from Fed Chair Yellen have confirmed the high likelihood of an initial rate hike before the end of the year. The FOMC meetings in September and December are possible dates for such a step, as they are followed by a press conference. We favor September. The upcoming labor reports will be decisive. The FOMC has not stated to what extent the labor market would have to improve further to trigger a rate hike. We think that, since the unemployment rate is already low, not much more is needed. The two upcoming labor market reports will be decisive for our forecast. We expect them to show a continued improvement and, accordingly, for interest rate expectations to rise and the dollar to firm. At the same time, we only see limited gains for the dollar. A strong appreciation (parity and below) would have negative repercussions on the US economy, which in turn would lower interest rate expectations, erasing the basis for the dollar appreciation.
Together with our expectation of a continued improvement of the economy in the Eurozone, a sideways movement of the EURUSD between 1.05 and 1.1 seems the most likely development to us in the medium term.

JPY – Yen is strengthening, according to decline in Bund yields

Japan's economy delivered a positive surprise in the first quarter with growth of 1.0% q/q. Indicators released so far point to a continuation of economic growth in the second quarter. In 2Q, consumer confidence continued to improve (+2%) relative to the first quarter average, which indicates moderate growth in consumption. On average, the manufacturing purchasing manager index rose slightly above the threshold of 50 in 2Q (indicating growth in industrial production).

Inflation declined to 0.1% in May (previously 0.2%). Due to the dampening effect of low energy prices, Bank of Japan (BoJ) board members currently expect that the price stability target of 2% will only be reached in the course of the first half of 2016 (previously in the course of 2015). At the last meeting in June, a clear majority of the BoJ's board voted for an unchanged continuation of the asset purchase program (JPY 80trn p.a.) until the price stability target of 2% is attained.

In recent weeks, the yen has continued to strengthen against the euro (a move from 140 to 136). The move occurred largely simultaneously with the political uncertainty around Greece and, accordingly, with the decline of German Bund yields. Over the last few months, the level change of Bund yields was the most important short-term influencing factor for the EURJPY. The technical picture is mixed. The EURJPY is currently trading above the moderately declining 150-day moving average. The latter is signaling a long-term falling trend. The 140 level still represents a resistance level; we see support levels between 127 and 130 and thus limits to further strengthening of the exchange rate. Therefore, we would assess a fluctuation of the EURJPY between 130 and 140 as the most likely scenario in the short term. Should this bandwidth be broken, we might see stronger movements in the corresponding direction. The analyst consensus currently expects the EURJPY to stabilize around the 135 level in 2015.

EURCHF – Tensions in the euro zone imparting strength to the Swiss franc

The Swiss franc has reacted to the recently achieved stabilization of the situation in Greece with a small but noticeable weakening. On July 20, Greek banks reopened. The daily withdrawal limit of EUR 60 was replaced with a weekly limit of EUR 420 per person. On July 23, Prime Minister Alexis Tsipras obtained approval for the second reform package from the Greek Parliament.
During this week, the EURCHF has risen from approx. 1.045 francs per euro to more than 1.050 for the first time in a month. The upheaval surrounding Greece's unresolved problems has lent support to the Swiss franc in recent months. The stabilization of the situation and expectations that Greece will, on one hand, receive the required financial aid, and that the requested reforms will, on the other hand, be implemented, significantly reduces the short-term appreciation pressure.

A certain degree of short- to medium-term appreciation pressure nevertheless still emanates from the significantly wider inflation differential between Switzerland and the Eurozone, as well as an increase in deposits. However, fundamental factors point to a moderate weakening of the Swiss franc over the medium term. For the time being, we maintaining our EURCHF forecast of a range between 1.05 and 1.10 in the third quarter of 2015 and continue to expect the Swiss franc to weaken slightly until year-end. The minimum exchange rate floor no longer exists, however. Should certain risks become manifest (e.g. geopolitical conflicts, turmoil in the Eurozone), the Swiss franc could once again strengthen rapidly and strongly.