Yen stable at around EURJPY 140

US dollar: tendency towards strengthening in the long run

Yen stable at around EURJPY 140

EURCHF – minimum exchange rate continues to be right tool

US dollar: tendency towards strengthening in the long rum

Contrary to our own as well as the consensus expectations, the euro has once again strengthened. This could be connected with the ongoing growth of the Fed's balance sheet. An additional factor is the ECB's tighter monetary policy. In spite of declining inflation rates, the central bank has taken no new measures this year. As a consequence, real interest rates in the euro zone have risen (e.g. German two year yields minus the inflation rate). They are now higher than those in the US, which lends support to the euro. From this perspective, low inflation rates and a stronger euro are reinforcing each other. We have once again adjusted our euro forecast to a slightly higher level, and see slight upside risk over and above our estimate. In the medium to longer term, stronger economic growth and higher interest rates in the US, as well as 'fair value', argue for a stronger US dollar.

Yen stable at around EURJPY 140

The Japanese economy is recovering moderately. While exports have remained relatively stable, investment activity has picked up, as corporate profits have increased. A front-loaded increase of consumer demand is visible, as VAT will increase at the beginning of April (from 5% to 8%). When this front-loaded increase in demand abates, demand should be affected.
Nevertheless, the Bank of Japan expects a continuation of the moderate economic recovery. Inflation amounted to 1.3% recently and inflation expectations seem to be rising, on the whole. To achieve the price stability target (2%), the Bank of Japan will continue its quantitative and qualitative monetary easing.

The yen has moved sideways around EURJPY 140 over the last few weeks. According to the Bloomberg consensus, analysts expect a stable sideways at EURJPY 142 over the next four quarters.

EURCHF – minimum exchange rate continues to be right tool

The moderate recovery of the global economy continued in the fourth quarter. Nevertheless, ‘there are still substantial risks attached to the global economic recovery.’ In Europe, the growth was geographically broaderbased than in the previous quarters. According to the SNB, concerns over the state of the Euro Area financial system are likely to remain high until the assessment of banks’ balance sheets has been completed. The decline of inflation rates internationally and the slightly stronger Swiss franc are delaying the move of inflation into positive territory. Therefore, the SNB has once again adjusted its conditional inflation forecast downwards by 0.2 percentage points compared to December 2013. With the new figures, the SNB expects an inflation rate of 0% in 2014 and 0.4% in 2015. The forecast is based on the assumption that the Swiss franc will weaken over the forecast period.

The SNB has once again confirmed that, with the three month Libor close to zero, ‘the minimum exchange rate continues to be the right tool’ to avoid an undesirable tightening of monetary conditions. Given the current geopolitical risks, vulnerability of the financial markets at any point cannot be ruled out.
Thus, we expect the EURCHF exchange rate to move within the bandwidth of 1.20-1.25 francs per euro with the forecasted rate staying in the middle of this range at about 1.23.