Dollar: large departures, little trend
Yen: sharp depreciation due to market fears
Swiss franc: movement towards lower bound
Dollar: large departures, little trend
The EURUSD exchange rate is currently quoting at almost exactly the same level as it was in our last Forex News – significant departures from this level have, however, been seen in the meantime. The Eurozone debt crisis seems to be encouraging investors to see the dollar as a safe haven. This is reinforced by the fact that – in contrast to the situation several months ago – interest receipts on euro investments are no longer any higher than those on the US dollar. There is therefore less incentive to hold the euro. This is related to the ECB’s “proactive” monetary policy, both in terms of rate cuts and of generous liquidity provision (the central bank is providing unlimited liquidity up to three years). An example of the consequences of this is that the very short-term yields of German government bonds have even decreased below zero. Overall, countermovements – euro strengthening – are to be expected, especially in the case of short-term relief with respect to the debt crisis. On a one-year horizon, however, the dollar should – after a long period of being undervalued – return to fair value at EURUSD 1.25.
Yen: sharp depreciation due to market fears
Following several newspaper articles which stressed that, in 2011, Japan exhibited an annual current account deficit for the first time in 30 years, the yen depreciated sharply. The consequences of Fukushima (production shortages, repatriation of capital for reconstruction…) contributed to the fact that the current account surplus slumped this year and reached negative territory. Accordingly, fears arose on the markets about whether Japan would turn from a saving nation with a current account surplus to a deficit nation dependent on external financing (esp. of government debt). Even though demographic arguments in particular could speak in favor of Japan going in this direction, it seems unlikely that the process would occur “immediately“. From the standpoint of BoJ President Shirakawa, the current account should turn positive in the foreseeable future. As a result of Fukushima, the numbers for 2011 are also not representative, in our opinion. It is worrying, however, that there might be energy (and thus production) shortages, following the shutdown of all nuclear power stations during the summer. Similar development thus also seems possible for 2012. For the time being, we nevertheless stick to our assessment that the exchange rate should move close to the “fair value” of USDJPY 78 (EURJPY 97.5). Only as a consequence of interest rate hikes in the US/EZ should depreciation of the yen occur – which do not seem likely at the moment.
Swiss franc: movement towards lower bound
After the exchange rate of the Swiss franc moved sideways during the holiday season and showed hardly any changes, a slow (though steady) appreciation trend towards the minimum exchange rate of EURCHF 1.20 set in at the beginning of the new year. The credibility of the Swiss national bank was not brought into question, however, and the lower bound was not tested.
Meanwhile, inflation in December was once again in the negative region (-0.7%). Hence, inflation of -0.45% in 4Q11 was slightly below the SNB forecast, provided in December (-0.4%). The future policy stance of the SNB and any possible measures depend on the ongoing process of assessing the deflationary and economic risks. In any case, in an interview with the newspaper NZZ published last Saturday, interim president Thomas Jordan emphasized that the SNB was still ready to take further measures if necessary, and that there currently was no alternative to the minimum exchange rate. He also reasserted that the SNB would enforce the lower bound with the utmost determination. Even after the resignation of President Hildebrand, its mandate to “ensure price stability and, in so doing, to take due account of economic developments” occupies center stage, since the monetary policy of the national bank is not dependent on any particular individual.
While the introduction of the minimum rate reduced downside risks, there may also be further negative shocks, Jordan said. If the economic development and deflation risks require it, the SNB would take further measures in order to guarantee price stability. In our view, raising the minimum exchange rate would be the most likely alternative in such a case. Nevertheless, in the event of massive escalation of the debt crisis in the Eurozone, it is uncertain for how long the SNB would be willing to defend the minimum exchange rate by buying foreign currencies. As long as there is no final and sustainable solution of the European sovereign debt crisis in sight, we continue to expect appreciation pressure weighing on the Swiss franc in the medium term, stemming from “safe haven” inflows. We thus keep expecting development near the EURCHF minimum exchange rate of 1.20 in the medium term.
