EURUSD – Turmoil in the markets leads temporarily to a firmer euro

EURJPY – Yen in a tight trading range

EURCHF – Negative interest rates to remain in place for some time yet

Market turmoil could result in postponement of first US rate hike

Recent turmoil in stock markets had strong effects on EURUSD as well.
The euro was able to strengthen up to USD 1.17, but subsequently quickly declined again to the current level of slightly above 1.12. The trigger for the temporary rally was in all likelihood squaring of positions that was in turn triggered by the massive price decline in stock markets. Evidently market participants had funded speculative positions with the euro to a large extent and were forced to close out their positions as well as repaying their euro denominated funding, which increased demand for the euro. We cannot say whether the market turmoil is already over. However, what will be decisive for EURUSD in the medium term is when the Federal Reserve will implement the first rate hike. We had expected this to happen in September, but the enormous volatility in stock markets could lead to hesitation on the part of policymakers. The decision will be difficult. On the one hand, a slowdown in the growth of China's economy is unlikely to have any significant effects on the US economy. Nevertheless, the hysterical market reaction to it could on the other hand actually affect consumer confidence. The coming two weeks until the rate decision will be decisive in our opinion. If the markets calm down again and the upcoming payrolls report shows a continuation of positive employment trends, the door to a rate hike would remain open, otherwise it would probably be postponed to December. We remain of the opinion that the Fed will still hike rates this year and that the dollar should strengthen from current levels. We see the probability of a rate hike in September at 50% at present, which is lower than previously. We accordingly raise our September forecast for EURUSD slightly to 1.08.

JPY – Yen in a tight trading range, Japan’s economy weakens in 2Q

Japan's economy contracted by 0.4% q/q in the 2nd quarter, delivering a negative surprise. Weak consumer demand and disappointing exports were primarily responsible for this development. Leading indicators released so far aren't providing any positive indications for the 3rd quarter. Consumer confidence has continued to decline slightly in July and points to a continuation of weak consumption in the 3rd quarter. The manufacturing purchasing managers index by contrast exhibited a slightly positive trend and points to an increase in industrial production in the 3rd quarter.

Inflation has declined to 0.0% y/y in July (previously 0.1%). Due to the dampening effect of lower energy prices, Bank of Japan (BoJ) board members continue to expect that the price stability target of 2% will be attained in the first half of 2016. At the last board meeting in July a clear majority of BoJ members has voted in favor of a continuation of the asset purchasing program (JPY 80 trn. p.a.), until the price stability goal of 2% is achieved.

In recent weeks the yen has traded in a tight range between 135 to 139. Recently the correlation between Bund yields and the EURJPY cross rate has weakened. Neither higher Bund yields, nor negative growth in Japan in the 2nd quarter were able to keep the yen from firming slightly to the 135 level. Based on our yield forecast (rise in the Bund yield to 0.9% by the end of September) we would however expect a counter-trend move from a fundamental perspective, i.e., a weakening of the yen vs. the euro, over coming weeks. The technical picture remains mixed. The cross traded slightly above a by now moderately rising 150-day moving average. In the short term, this would in principle also argue in favor of higher prices (= weakening of the yen). Currently the exchange rate is in a very tight trading range between 135-139. Should this range be violated to the upside or the downside, a short term acceleration in the respective direction of the move could subsequently occur. The ~140 level represents significant resistance on the upside, while prices have strong support in the 133 - 134 area. The analyst consensus currently expects a slight decline in the exchange rate to levels around EURJPY 134 in 2015.

EURCHF – negative interest rates to remain in place for some time yet

“We will have to live with negative interest rates for some time in Switzerland, in order to reduce the attractiveness of the Swiss franc” SNB chairman Thomas Jordan said in an interview with the Neue Zuercher Zeitung on Sunday, August 30. According to Jordan, the Swiss franc remains significantly overvalued.
“Negative interest rates and the willingness to intervene in foreign exchange markets if needed should contribute to a gradual weakening of the Swiss franc over time”. The SNB chief has once again stressed that the SNB's forecasts “assume that inflation will return to positive territory again in 2017”.

The Swiss economy suffered considerable damage due to the Swiss franc's appreciation. In the 1st quarter of 2015, quarterly growth turned negative according to SECO's calculations (-0.2% q/q). In the 2nd quarter, positive growth of 0.2% was recorded. This positive GDP growth was supported by the balance of trade in goods, internal consumption, and investment. This is a significant improvement compared to the 1st quarter and can be interpreted as a first sign that the Swiss economy is adapting to the change in conditions.

In recent weeks uncertainty in Europe has declined significantly due to the stabilization of the situation in Greece and clear signs of an economic recovery in most European countries. The Swiss franc has reacted to these developments with a substantial weakening from 1.06 Swiss francs per euro at the end of July to nearly 1.09 Swiss francs per euro. We continue to maintain our EURCHF forecast of a trading range between 1.05 and 1.10 in the 3rd quarter of 2015. We expect that unless any additional risks should suddenly gain in importance (e.g. developments in China, geopolitical conflicts), the Swiss franc will continue to weaken moderately until year-end due to the effect of negative interest rates.
However, there is no longer a minimum exchange rate in place. Should risks become manifest, the Swiss franc could once again appreciate rapidly and strongly.