Yen: End of weakening?
US dollar
The US dollar has been rather static over the past two weeks. In spite of a (half-hearted) attempt to break through EURUSD 1.25, the exchange rate oscillated around 1.26 for most of the time. This is just more proof that the strengthening of the US dollar that started at the beginning of the year has turned into a sideways movement. The next trend that we should see is the weakening of the dollar.
The steps taken by the US authorities, which we have already described in the past, are the reason we expect the dollar to slide in the foreseeable future. The massive increase in public debt together with the extension of the balance sheet of the central bank is aimed at inflating the economy. These efforts will probably not be aborted until the desired result takes effect. This means the dollar will lose some of its purchase power, which should result in its depreciation against the euro. At the moment the dollar still benefits from the uncertainty on the financial markets. However, this effect has been on the decline, as indicated by the stabilisation of the exchange rate over the past weeks. We expect this development to continue, and we believe that macroeconomic data will gain in relevance again with regard to the EURUSD exchange rate. The downside risk is that shocking news might shake the markets and thus set off another period of strength for the US dollar.
Swiss franc
The ECB’s rate cut last week triggered (as expected) a slight strengthening of the Swiss franc.
On the occasion of the yearly country report, the IMF attested that Switzerland’s measures to counteract the crisis were appropriate. Still, a shrinking of GDP by -2% to -3% in 2009 was to be expected. The stimulus packages as well as stabilizing measures for the financial markets were said to be effective, but further steps might prove necessary.
Indeed, the big question is if the SNB will, in addition to a possible rate cut (we think that a lowering of the mid-point of the target range to 0.25% is slightly more likely than unchanged rates), implement alternative measures to ease monetary policy further. As stated by council member Hildebrand in January, such measures are not to be ruled out, and time will show if this was only a “verbal intervention”. In any case, it helped avoid a further strengthening of the franc at that time.
News from the financial sector was not scarce last week: SNB President Roth announced his retirement at yearend and some important executive/board members of UBS and Swiss Re resigned.
Altogether, a strong franc is still to be expected, based on its safe haven property. A counteraction by the SNB could lead to a possible weakening, though, and could help the export-oriented Swiss economy.
Japanese yen
It seems as if the catastrophic Japanese trade data is slowly gaining an influence on the exchange rate again. The yen lost 11% against the US dollar, but this trend has come to a halt and the USDJPY oscillates currently around a level of 99.
Fundamental economic data does not point to a unique preferential direction for the exchange rate, even though it indicates that past highs were “exaggerated” (cf. “Currency models” to be published on Thursday). In contrast to this, there is still the risk of a renewed strengthening in the case of financial market turmoil. Even though the yen seems to have lost part of its appeal as a safe haven, we think that the time has not come yet to give the all-clear.
