EURCHF oscillating around 1.50
Yen persistently at strong levels
US dollar
As the ECB left the interest rate unchanged at 2% at their February meeting, we expect – given the weak economy and rapidly recessing inflation – a 50bp rate cut in March. Further rate cuts cannot be ruled out, but ECB President Trichet insinuated that rate cuts to zero do not seem appropriate. The ECB still has a greater margin for rate cuts than the Fed, but we think that rate cuts should be over by the second half of 2009, implying that the euro could only weaken in the short term vs. the US dollar. On both sides of the Atlantic, generous spending programs aimed at the stabilization of financial markets and the economy are being implemented, but it is too early to estimate their possible impact. Even though no clear decision has been taken regarding the possibility of long term treasury purchases by the Fed (particularly as the efficiency of such measures is still controversial), these plans could still be realized. In that case, investors would receive lower interest rates for higher inflation risks. Hence, we think that the USD would be less attractive. For some weeks, the dollar has been in a volatile sideways movement around 1.30; in the short term, this movement could continue.
Swiss franc
Since the beginning of the year, the Swiss franc has oscillated around EURCHF 1.50. The reporting season in Switzerland set in with worse than expected losses from Swiss Re and UBS, but the franc has hardly shown any reaction thus far. On one hand, negative figures point to a deteriorating Swiss economy and hence a weaker currency. On the other hand, the safe haven property implies gains of the Swiss franc in case of negative news flow, and both sides seem to be balanced right now. Since the intensification of the crisis in September, exchange rate variations have been significantly higher, however. For EURCHF, 2% intraday variation can easily be observed, and we expect the volatility on the currency markets to persist for some time. If the expected rate cut by the ECB in March supports the franc significantly, the SNB should counter-steer, in our opinion. At present, the 3M Libor is in the middle of the target range of 0-1%, while the SNB is lending francs at an interest rate close to zero; hence, a further lowering of the 3M Libor via lowering the lending rate is not possible right now. Even so, there are alternative instruments to the ON lending rate to influence the interest rate or the exchange rate. On the whole, we think that, in contrast to the current sideways movement, a further strengthening of the Swiss franc is possible in the case of renewed turmoil on the financial markets, which the SNB would try to forestall.
Japanese yen
The yen remains close to a USDJPY level of 90 and was unimpressed by incoming data reflecting the massive deterioration of the Japanese economy. Thus, the home-flow of investor money, dissolution of carry-trades and safe haven effects still dominate the exchange rate. We think that, as long as the crisis lasts, the yen will remain at high levels and could even strengthen further, but should (due to weak economic data in Japan) reverse towards USDJPY 98 in the long run. The timing will strongly depend on the further evolution of the crisis. Just as the extent and pace of the deterioration were hardly foreseeable, the variations on currency markets could hardly be predicted and a “normalization” of the situation has still not materialized.
