Swiss franc: 9% in one month; All-time high
Yen: Firmer vs. all currencies
Special theme: Volatility
Exchange rate fluctuations higher than ever
US dollar
The firming of the USD did not only continue in the past few weeks, but even picked up speed. The reasons were not easily discernible, because neither was the news from the US relatively good nor was the news from Euroland relatively bad. The fact is that the (gloomy) outlook for the two economic regions is being determined by the financial market crisis. Thus, the cause of the weakness of the euro is probably to be found in the reshuffling of assets taking place due to the high degree of insecurity. In such an environment, risk-return ratios lose importance.
A look at the data shows that, in fact, there is not much in favour of the US dollar. The current account deficit is still relatively high and the diverse bailout plans will increase the volume of foreign capital needed. At the same time, the interest rate level is far less attractive than in Euroland. Furthermore, the medium-term problems must be taken into account that the US will face as a consequence of the burst real estate bubble. Of course, in Euroland some difficult economic times lie ahead, but the economic imbalances are by no means as wide as in the US. Thus, the crucial question for the further course of the EUR/USD exchange rate is how long the reshuffling of assets will last that was triggered by the crisis. The current phase of extreme insecurity (see our calculations on exchange rate fluctuations below) renders it impossible to assess the short-term course of the EUR/USD exchange rate. Thus, the only firm statement we can give is that the current level of the USD is due to the crisis, and therefore, it is not sustainable. However, when the situation on the financial markets will stabilize is a question that cannot be answered. We expect the situation to improve at least before year-end and therefore a weakening of the USD until then.
Swiss franc
The Swiss franc is still being driven by the turmoil on the financial markets. It gained 9% versus the euro last month and thus hit an all-time high. Nonetheless, it cannot be ruled out that it will firm even further in the short term.
After the SNB lowered its overnight money rate to 0.25%, the Swiss 3-month Libor finally quoted just within the bandwidth of the SNB of 2% to 3%. It is apparently difficult to push the 3M-CHF Libor even lower. On the other hand, ECB President Trichet sent some clear signals of an interest rate cut in the euro zone. As the SNB holds a regular meeting only every three months, it is unclear if it plans to wait until March to follow in step with the ECB.
Additionally, the firm Swiss franc is weakening exports, which is also an indicator of a cut in interest rates.
However, we expect these to be smaller than in Euroland.
The Swiss franc SWAP auctions at which ECB-eligible banks can exchange CHF for EUR every week are becoming increasingly popular. Almost the entire amount of EUR 10bn has been allotted. This means that demand for the Swiss franc is still high.
Demand has additionally been stimulated by the closing out of carry trades and foreign currency loans, but above all, by the growing flight of investors and financial institutions into safe havens. On the whole, we believe that the extent to which the franc will firm will depend mainly on the situation of the financial markets and less on fundamental economic data.
Finally, we want to point out again that insecurity is still growing and that this implies a risk. The fluctuations of the exchange rate are presently reaching heights unseen to date, and the markets expect this development to continue. In such an environment, it is becoming increasingly difficult to make point estimates. Therefore, we have added bandwidths of possible short-term developments to our forecast in an Annex.
Japanese Yen
If one were to rank the currencies in the current environment, then the yen would be the strongest. It has seldom traded at its current level, even versus the Swiss franc and the US dollar. In this case as well, the trend has probably been triggered by the massive closing out of loans in yen. These loans were used to invest in more profitable markets. For example, according to Bank of Japan Assistant Governor Akinari Horii, many Japanese retail investors are now withdrawing capital in order to shift it as best as possible into “safety”. This is resulting in a massive firming of the yen, which was also discussed at the G7 summit over the weekend and referred to as a worrying development. Rumours were circulated that Japan would welcome an intervention to weaken the yen, but that this was not supported by the other countries. Therefore, the intervention was verbal: Minister of Finance Nakagawa insinuated that Japan would intervene should the yen firm even more.
The banking crisis has also reached Japan due to plunging stock prices. Thus, the same as in the euro zone and in the US, a number of measures have been initiated to stabilize the financial sector. Still, the BoJ will hardly change the current interest rate of 0.5%, but will rather counter the trend by increasing liquidity.
We believe that the yen will continue to fluctuate widely and that it might even advance further. The magnitude expected of these fluctuations is shown in the corresponding chart in the Annex.
