Dollar tumbles after FOMC decision
CHF weaker, thanks to SNB
Yen: Sideways with variations
US dollar
After the latest meeting of the Monetary Policy Committee of the US Fed the US dollar took one giant step down. This move was caused by the surprising announcement by the Fed to buy a massive USD 1,150bn worth of securities, which is equal to about 8% of GDP. This additional capital in the economy inflates the value of the dollar, because it is not based on any economic output.
EURUSD shot up from 1.3 to 1.37 right after the announcement, but has settled around 1.36 since then. The reaction was that pronounced because nobody had expected measures of that magnitude. Although the US central bank had been publicly mulling over buying government bonds since the end of last year, the actual surprise was in the additional USD 750bn of securitised mortgages. In addition to USD 300bn worth of government bonds, USD 100bn worth of agency bonds ended up on the shopping list as well. The drastic action seems to be a result of the central bankers’ growing fear of deflation, as had been insinuated in the press release following the FOMC meeting. Among the most important central banks, ECB is therefore the only one that has so far refrained from pumping liquidity into the markets by buying up securities. We believe that the ECB has other means of supporting the financial sector and the economy, even more so since there is still the option of cutting interest rates. It is difficult to judge to what extent markets are banking on direct purchases of securities by the ECB. Such expectations, if any, should be disappointed in the next meeting of the ECB, which might in turn trigger another fall in the dollar.
Swiss franc
At their last meeting, the SNB announced significant measures for a further relaxation of monetary policy. In addition to a further lowering of the target range for the 3M Libor to 0-0.75% (0.25% was stated to be optimal), “alternative measures” have been agreed on. First, the SNB announced the purchase of bonds issued by the private sector in order to increase liquidity on the markets and lower financing costs for the economy. Second, FX interventions have been announced to avoid leaving the Swiss franc at high levels. This means that a moderate, but not excessive, weakening of the Swiss franc is desired, so that a distortion of competition can be avoided (Switzerland should not suffer from an excessively strong franc, nor should an artificially weak franc lead to a “beggar thy neighbor” policy.)
The reactions to this announcement have been evident: the EURCHF moved from 1.48 to 1.52 in the 15 minutes following the statement.
The SNB justified this decision with the sharp deterioration of the economy (their new expectation is -2.5 to -3% of GDP growth for 2009), as well as risks for negative inflation rates for some time (the new forecast is -0.5% for 2009). Hence, we do not expect any interest rate changes for the coming period. If the Swiss franc should strengthen again, the SNB would counteract this and could even announce an explicit target if necessary, according to council member Jordan. In contrast to this, we do not think that the Swiss currency will weaken significantly either, as the demand for “safe havens” is still high, due to the ongoing financial crisis. On the whole, the most likely scenario is a sideways movement around the current levels, while short-lived departures from it are still to be expected.
Japanese yen
After the announcement of the Fed’s purchase of long-term treasuries, the yen strengthened significantly vs. the US dollar, but has returned to its previous levels by now. This game could be repeated and a renewed firming cannot be ruled out. In the long run, we think that the Fed’s measures stand against those of the BoJ (which decided to increase the purchase of JGBs as well); hence, a clear stimulus from this side is only to be expected in the case that the Fed increases its purchases significantly. Economic data still points to a weaker yen, whereas the demand for safe havens indicates the opposite. On the whole, the yen should remain close to the current levels.
Versus the euro, the yen has thus weakened approximately to the same extent as the dollar.
