Swiss franc sideways – SNB intervenes verbally to prevent strengthening
Yen still stronger – BoJ expansive
US dollar
In the last two weeks, three member countries of the Eurozone have been downgraded by one notch by Standard & Poor’s, which led to discussions on the stability of the monetary union. In addition, the European Commission revised the 2009 growth forecast significantly downwards to -1.9%. Equity markets reacted to the negative news flow with losses, and the US dollar gained about 3% against the euro, owing to its safe-haven status, even though the entire gain has been shot down by now.
Both the US and the European economies should shrink by a significant amount this year. But whereas the Fed, after having lowered interest rates to zero, does not have any margin for further cuts, the ECB can still support the economy by lowering interest rates. As we think that the ECB will maintain the rates from the end of March (after one more downwards move) on, this should only weaken the euro temporarily though. The spending policies and the massive increase in the supply of funding should have an inflationary effect in the long term. Furthermore, the Fed is considering buying treasuries to keep yields low. Hence, high inflationary risks stand against low interest rates, possibly decreasing investor demand for US treasuries and implying a weaker dollar.
Swiss franc
Factoring in that the current environment lead to wider fluctuations of exchange rates, the Swiss franc has basically moved sideways. The joint EURCHF Swap auctions by the ECB and SNB have been extended until the end of April, contributing to the stabilization of the exchange rate. In principle, the fact that the ECB has more space for further interest rate cuts than the SNB implies a strengthening potential for the Swiss franc. In contrast, SNB Councilor Hildebrand mentioned on the occasion of a talk at the HSG alternatives to lowering rates. To support the economy from the monetary side, low long-term financing costs (to support consumption and investment) and a weak franc (stimulating external demand) are needed. In order to lower long-term interest rates, the SNB could extend the duration of the Repo auctions or buy government bonds. For a weaker franc, the monetary aggregates could be extended: “For example, the national bank can sell an unlimited amount of Swiss francs against foreign currencies”. This “verbal intervention” has counteracted a further strengthening of the Swiss currency, but will probably not suffice for a further significant weakening. Negative news from the industry (as it is reporting season for annual results) could persist for some time and support the Swiss franc, due to its safe haven property – with bad news leading to strengthening.
Japanese yen
The yen remains at high levels and has lived up to its reputation as the “strongest currency”. Japanese interest rates have been close to zero during the last few years, in contrast to overseas economies. This made so-called carry trades, which are investments financed in yen and invested abroad, very attractive. As interest rates worldwide have been lowered, the interest rate spread has decreased and carry trades have been cancelled, leading to a strengthening of the yen vs. other currencies. In addition, Japanese investors dissolved investments abroad as the gains had been eroded by the yen’s strengthening. The stronger yen has also been partly responsible for a sharp decrease in external demand (December’s exports shrank by a tremendous 35% vs. the previous year’s value). Hence, a weak yen would be of great importance to the Japanese economy – interventions have only been evoked theoretically until now, though. On the whole, we think that the prevailing uncertainty and the lower interest rate differentials are still in favor of a stronger yen, leaving the USDJPY quoting above 100 as a long-term project.
