CHF: SNB against safe haven status
USDJPY breaks through 100
US dollar
EURUSD oscillated in a range of 1.32 to 1.35 last week. The decisive determinant for the movement within this band was the sentiment on the stock exchanges with the well-known rationales: rising equity markets were interpreted as sign of an earlier-than-expected end of the current crisis and therefore a lower volume of “safehaven” inflows into the US dollar, and the dollar depreciated. Falling share markets triggered the same rational, except just the other way round.
The most important event since the latest FX News was the ECB meeting on 2 April. The key lending rate was cut by 25bps to 1.25%, i.e. in line with our expectations. The market had anticipated a bigger cut. Higher-thanexpected interest rates bolstered the euro, but the exchange rate failed to reach its end-of-March level of 1.36.
There are probably two reasons to that: First of all, ECB President Trichet clearly indicated that the rates would be cut again in the next meeting, and secondly the decision on any “non-standard” measures is still pending and is supposed to be taken at the beginning of May as well. “Non-standard” measures are those that go beyond the classic set of instruments a central bank would usually resort to implement its monetary policy. The further expansion of the maturity of repo transaction has been mentioned as well as the purchase of securities of private issuers in this context. The latter action has already been taken by the US Fed and constitutes an inflating measure with negative repercussions on the currency. We do not expect the ECB to go down the same road, so the dollar would loose in value relatively. Even if the ECB were to follow the Fed, the magnitude of the purchase programme would be well below that in the USA, where the economic problems are more troublesome. This means that even in this case we could expect the US dollar to decline.
Swiss franc
According to Thomas Jordan, who has been appointed vice-president of the SNB today, the National Bank has already embarked on purchases of corporate bonds and interventions on the FX markets. Above all, the SNB fears the threat of a deflationary cycle. A significant shrinking of the economy is anticipated, which will exert a downward pressure on prices. If households and companies start to anticipate that prices will decrease in the future too, this would lead to a postponing of investments, implying less demand. In this way, a negative loop could appear. A strong franc would worsen the situation, as prices of imported goods (such as oil) would be even lower. The SNB is trying to counteract this additional weight.
Furthermore, the purchase of corporate bonds implies a widening of the monetary base, bearing inflationary risks in the long run. This is why the central bank should have in mind an exit strategy for such measures as soon as they are put in place, according to Jordan. For the moment, it is all about lowering financing costs and facilitating access to credit. Here, the Pfandbriefe should provide some additional support.
On the whole, we think that such expansive measures seem to be necessary to fight against the current crisis. As the Swiss franc remains a safe haven, the monetary policy of the SNB should contribute above all to a stabilization, and we expect the Swiss currency to remain close to the current levels.
Japanese yen
The yen crossed the level of USDJPY 100 for the first time in five months. We see this as a sign that the times of the USDJPY close to 90 are over for the moment. The very weak Japanese economic data (exports, industrial production or the Tankan) seems to be the main driver for this weakening. Perhaps the first indicators pointing to a slowdown of the downturn in the US (in contrast with Japan) have also contributed. In our opinion, the level of the exchange rate is now in accordance with expectations for economic dynamics; hence, we do not see any additional stimulus from this side.
The BoJ left the interest rate unchanged at 0.1%, in line with expectations. Furthermore, the range of eligible collateral for credit was extended. The BoJ’s expansive approach is similar to that of the Fed, implying that monetary policy is approximately neutral for the USDJPY. Interest rate expectations are low for both countries - in Japan, due to past experience; in the US, thanks to the announcement of Bernanke on leaving rates at a low level for an extended period of time.
On the whole, we do not see much reason for a significant departure of the USDJPY from the current levels, but this could change again. The ongoing financial crisis might lead to renewed yen strengthening, but a sideways movement with oscillations is most likely.
The EURJPY should thus move in consonance with the EURUSD.
