Slower equity markets support the dollar
CHF sideways
Yen slightly stronger
US dollar
The euro continued to decline against the dollar during the past weeks. It even broke through the value of slightly above 1.31, which had been a bottom twice previously. There was no real reason for the depreciation of the euro. The macro data of the USA were only marginally better than those of Euroland, if at all. The dollar was surely supported by the waning dynamics on the equity markets.
The foreign exchange market relies on the equity markets as crisis barometer currently. The weaker the equity markets, the more intense the uncertainty and the more inflows into the US dollar are anticipated. This means the dollar is receiving a big leap in faith from the investment community, which is not justified by the current data set of the US economy. In this respects we already mentioned the security purchases by the central bank and its consequences in previous Forex News. We believe that these purchases will indeed be stepped up. A number of statements made by representatives of the central bank and the persistent risks involved in lending would support this view. Provisions and write-offs in the banking sector have not peaked out yet, which means that banks will remain restrictive in their lending. In a reaction to this situation, the central bank will probably expand its actions to boost lending – in other words, step up the security purchases. The next meeting of the Open Market Committee will be held on 28 and 29 April. Whether any new purchases will be decided then remains dubious, given that the volumes were massively expanded only at the latest meeting in mid-March. But additional purchases should be announced at the June meeting at the latest. In the short run, EURUSD could still be determined by the development on the equity markets. But the monetary environment will continue to deteriorate for the US dollar and thus ultimately cause it to depreciate.
Swiss franc
Since the SNB’s announcement after their last meeting on their intention to intervene on the currency markets, the Swiss franc has moved sideways around EURCHF 1.52. In our view, this level should be maintained in the medium term. At the General Meeting of Shareholders of the SNB, the action taken to stabilize the Swiss financial system and relax monetary policy was reviewed once more. The transfer of UBS’ illiquid assets to the special vehicle (CHF 40bn) is finished by now. In contrast to loans, financing conditions on capital markets have become increasingly severe, which is why the SNB has decided on purchases in this segment. At the same time that the 3M Libor has been lowered, the Swiss currency has appreciated significantly, thus increasing the risk of too low inflation rates.
This has led the SNB to intervene on the currency markets. The duration of repo auctions has been extended and swap agreements with several national banks have been put in place, which on the whole implied a tripling of loans given by the SNB. In order to facilitate the draining of liquidity in the future, the SNB also issued bills, thus lowering the inflationary risks of monetary expansion. On the whole, the SNB has acted in a resolute and innovative way, which will in our opinion also stabilize the Swiss currency and Libor in the future. The issuance of bills lowers the future inflationary risks for the currency, in contrast to the dollar (for example), which will reinforce the perception of the Swiss currency as a safe haven.
Japanese yen
The yen has again strengthened slightly vs. the US dollar. Similarly to the evolution of the US dollar vs. the euro, this might be related to safe haven flows. We think that, in case of renewed turmoil on the financial markets, this could become even more pronounced, although the highs seen in the past seem to be over now. This means that we see the USDJPY at around 95 to 98 in the mid term.
The next meeting of the BoJ is eagerly awaited - not because new measures are expected, but for the new forecasts that should be released. In particular, expectations for inflation should be updated, as the last month’s data showed a severe deterioration of the economy.
It has been mentioned that the BoJ did not want to increase their balance sheet further significantly, leaving less space for further action. In case of fears of a deflationary cycle, the BoJ should nevertheless think about counteracting this.
The significant economic deterioration in Japan has in our opinion caused the weakening of the currency since the beginning of the year, but should be priced in by now. Thus, there are few reasons from the Japanese side for a significant exchange rate movement. On the American side, on the one hand, there seem to be the first signs of a slowdown of the economic downswing; on the other hand, the measures taken by the Fed could have an inflationary effect in the long term. These seem to be balanced for the moment, particularly as the BoJ is purchasing assets too. Thus, we expect the USDJPY to move sideways in the medium run.
