• Home ::
• Fundamental ::
• Market View ::
• Forex News

• Send
• Print
• Add To
• Rss

Forex News

49379f6c-917b-4b32-99e3-6a2887d357d8

0

0

Correction expected for EURUSD

Thu, Sep 4 2008, 08:22 GMT
by Erste Bank Bond Research Team

Erste Bank der oesterreichischen Sparkassen AG

Swiss franc sideways

Yen moves stronger – Euro weakness accentuated

US dollar

The weak economic data from Euroland as well as the falling oil price caused the USD to firm further. As soon as it became clear that hurricane Gustav was not going to lastingly affect oil extraction in the Gulf of Mexico, the oil price dropped below USD 110, thus hitting the lowest value since April. For the USD, this meant a jump to the strongest level since the start of the year. However, the negative correlation between the oil price and US dollar cannot be conclusively explained. Nonetheless, markets followed this correlation that emerged in the course of last year, but is soon expected to phase out. There is actually no reason why a low oil price should have only positive effects on the USD. A positive stimulus for Euroland from this front would also be arguable. At the same time, the latest shift of EUR/USD does have a basis in the real economy. The outlook for Euroland’s economy has deteriorated massively since mid-year and the latest data do not contain any signs of stabilization yet.

Nonetheless, it looks like we are in for an at least short-lived countermovement of the EUR/USD. Since mid-July, the euro has lost almost 10% in value versus the USD, which is a massive movement, even if one takes into consideration that it started out from an all-time high of the euro. Furthermore, the situation of the US economy is anything but good. The correction on the real estate market will last far into next year, further shocking news is expected from the financial sector and the economy should remain weak. Furthermore, interest rates are much higher in Euroland. Therefore, in the short term we expect a countermovement of the EURUSD exchange rate to 1.5. Until year-end, the exchange rate should persist in the trading range of 1.45 to 1.5. Long-term, the USD has further firming potential.

Swiss franc

The Swiss franc remains in a channel around 1.61 EURCHF. On one hand, several factors (e.g. purchasing power parity) indicate a stronger franc, but this has not materialized yet. Swiss GDP data (with a quite positive reading, in line with expectations) and the lower than expected Swiss inflation data for August did not show a clear influence. On the other hand, the interest rate differential to Euroland still seems to suggest the attractiveness of carry trades (even if the FX risk is taken into account) and hence a weaker franc.

Since April, the franc has lost some of its status as a safe haven currency and did not react to the last downward movements on equity markets. If this is now true more generally, and what would happen in case of a serious financial market downturn, remains an open question - we think that, in the case of extraordinary events, the safe haven status would rapidly return. In principle, we expect a slight appreciation in the mid term for the Swiss franc.

Japanese Yen

The yen approached the level of USDJPY 107, but recently rebounded. We think that the USDJPY will remain in a channel of 105 and 110. GDP data from Japan and the US had scarcely any impact, and the interest rate differential is constant and should be until next year. Shrinking exports to the US could possibly weaken the yen slightly.
In contrast, the yen appreciated sharply against the euro (157 EURJPY), but this movement was mainly caused by EURUSD. A EURJPY reading as of the beginning of the year seems unlikely, from our point of view, but serious financial market turbulence could provoke such a move.
Altogether, we expect the yen to move sideways with respect to the USD. With respect to the euro, this means that EURUSD will be the main driving force.

• Download Full Forex News

Published on  Thu, Sep 4 2008, 08:30 GMT