Rate cut: Weaker franc
Yen close to historical highs – lack of room for rate cuts
US dollar
There wasn’t much news from the EUR/USD exchange rate in the past weeks. Decisive for the movements within the bandwidth of 1.24 to 1.29 was the extent of the insecurity on financial markets. Bad news – even if it came from the US – caused the USD to firm, while easing – like the bailout plan for Citigroup – pushed the USD down. Thus, the relative attractiveness of the US dollar is being determined by the current crisis.
When it will abate can hardly be estimated, because in the past few weeks alone, apart from Citicorp, the entire US automobile industry has also now become a patient. The market responded warmly to the bailout package for the major bank. The plea of automobile manufacturers for government aid was rejected for now. The chief executives of the corporations have until the beginning of December to present business plans for recovery and a vote on the bailout package is scheduled for 8 December. Without government help, US car makers will fall into very deep trouble and insolvencies would become highly likely. However, the most recent events also show that the EUR/USD exchange rate has bottomed out. Because in spite of the repeated aggravation of the situation on the financial markets already mentioned, the USD failed to climb to new highs. Thus, the US dollar rally seems to be slowly losing steam and if there is no more shocking news, the EUR/USD exchange rate should overcome the 1.3 mark. The situation will remain uncertain though, because further major US companies might run into trouble at any time, even though in the end – provided the companies are big enough – the government could come to the rescue.
Swiss franc
The SNB surprisingly cut rates by 1% last Wednesday, bringing the target range 2% below the level it had been at just six weeks ago. The central bank in this way clarified once more that it would “make use of its room for maneuver” to bring the rates closer to zero as soon as possible.
Nevertheless, both the timing and the extent of the rate cut gave rise to questions. In their extremely concise communiqué, the rate cut was justified by the rapidly increasing sluggishness of the economic situation and a careful monitoring of the exchange rate was mentioned. In addition, the sharp fall of the oil price and hence lower inflation expectations made the step possible. However, as there was no particularly bad news from the economic side, nor a sharp appreciation of the Swiss franc, it remains unclear what really triggered the rate cut. We expect the SNB to proceed with bringing interest rates close to zero as fast as possible and then leave them there.
The rate cut led to a further weakening of the Swiss franc, whose quote is now close to 1.55. The expected variations came down as well (see chart), yet we do not think the all-clear can be given. In case of renewed turmoil, the franc would appreciate sharply; the fact that there is more room for rate cuts in the Eurozone than in Switzerland would even reinforce this fact.
Japanese Yen
The yen remains close to its highs against the dollar. It has been said that some banks are obliged to buy yen for hedging purposes (as they had sold certain products previously). This would imply a stronger demand for yen, thus supporting the currency.
As Japanese interest rates have been close to zero for a long time and those in the US are getting close to zero, there can hardly be any new impulse for the exchange rate from this side. Furthermore, macroeconomic factors have not had hardly any impact during the last year; hence, the evolution of the yen will depend above all on rumors and news on financial markets. In any case, renewed turmoil would lead to a stronger yen.
