US dollar: should tend to strengthen in the course of the year

US dollar: should tend to strengthen in the course of the year

Yen expected to remain unchanged compared to euro

EURCHF – minimum exchange rate continues to be right tool

US dollar: should tend to strengthen in the course of the year

The EUR/USD exchange rate is currently subject to several opposing forces. On the one hand the liquidity situation and the end of the debt crisis continue to argue in favor of a stronger euro. On the other hand, stronger economic growth in the US, interest rates as well as 'fair value' based on purchasing power parity continue to point toward a strengthening of the dollar. Overall, we therefore see continued short term upside risk for the EUR/USD exchange rate, however, in the course of the year, we expect that the dollar will tend to strengthen.

Yen expected to remain almost unchanged compared to euro

In December, the yen weakened further against the euro to EURJPY 145, with a slight appreciation to 141 in the last few weeks. The economy in Japan continues to show signs of recovery, driven by an increase in private consumption as well as improvements in employment and income. Higher salaries are also expected to counteract the possible negative consequences of the VAT increase (from 5% to 8%) planned for April. The inflation rate rose further to 1.5% at the end of November. Prices grew on a broad basis, while inflation excluding food and energy prices was at just 0.6%. In the minutes from its November meeting, the Bank of Japan mentioned that inflation expectations have also increased. The BoJ is going to continue its expansionary monetary policy, aiming at price stability, with the inflation rate close to 2%.

According to the Bloomberg consensus, analysts expect the exchange rate at about EURJPY 140 in the next few quarters, while a further weakening of the yen against the US dollar will be somewhat compensated for by a weaker euro compared to the US dollar

EURCHF – minimum exchange rate continues to be right tool

The last few months showed some improvement in the international environment. The economic recovery outside Switzerland continues and the impact of the Euro Area sovereign debt crisis on financial markets has significantly subsided. The yield spread between Euro Area peripheral states (e.g. Italy and Spain) and Germany has reduced considerably. This improvement was accompanied by a corresponding depreciation of the Swiss franc, moving the EURCHF exchange rate further from its minimum rate of 1.20. It is, however, too early for optimism, as the economic situation abroad remains vulnerable and could lead to rapid changes of the sentiment in financial markets. The assessment of banks’ balance sheets in the Euro Area coming in 2014 could potentially lead to short-term fluctuations. In the mid and long term, the Asset Quality Review (AQR) should offer higher transparency and disclosure standards. With the 3-month Libor at 0.0-0.25%, the minimum exchange rate continues to be the right tool to avoid an undesirable tightening of monetary conditions in Switzerland. Temporary appreciation of the Swiss franc towards the minimum exchange rate in the case of renewed tension in financial markets is not ruled out, while the steady improvement of the global economic situation should push the EURCHF exchange rate up further from its minimum rate. Over the course of the year, we expect a development in the range between 1.20 and 1.30 EURCHF, with the forecasted rate for the next quarter staying at about 1.25.