EURCHF stabilizes close to 1.50
Yen stronger – renewal of mounting uncertainty
US dollar
The EURUSD has continued its volatile sideways movement around 1.40 in the last two weeks. After the ECB’s announcement to leave interest rates unchanged, the USD strengthened until 1.385 vs. the euro, but has come back since then.
Today’s release of US retail sales indicates that the US should overcome the recession sooner than the Eurozone, but this has to be put in the context of the massively increasing debt, as well as the supporting measures by the Fed. In the mid term, the Fed will have to reverse their action, which is challenging, as it should be soon enough to avoid inflationary pressures, but slow enough not to put an economic recovery at risk. The increasing US debt leads to record sales of treasuries, but also to higher mid-term inflationary risks. This would point to a weakening of the dollar vs. the euro. Even though US assets could be less attractive in the mid-term, the fact that they still represent a significant share of existing reserves worldwide should limit possible selling pressures.
In the short run, a negative evolution of equity markets can lead to renewed strengthening of the USD, due to the safe haven property. But on the whole, the USD should remain stable close to 1.4 vs. the euro for the time being.
Swiss franc
The Swiss franc has stabilized further vs. the euro since the last SNB meeting (see Forex News of June 17). Thus, the SNB’s counteracting of still prevailing strengthening pressures in the markets has been very successful so far, and it will continue the policy against an excessively strong franc. This should remain true for some time, even though, in the case of clearly lower strengthening pressures, the bank could relax its policy, leaving space for a moderate strengthening of the Swiss currency. Nevertheless, we do not think that this could happen anytime soon. Neither economic data nor unchanged interest rates for a time horizon of at least a year should contribute to this.
On the whole, we think that there are sufficient factors pointing to ongoing strengthening pressures, which in turn are counteracted successfully by the SNB, leading to a sideways movement of the exchange rate. This expectation seems to be prevalent on the markets too, as (in particular) the expected movements (implicit volatility) for the EURCHF has decreased lately, pointing to a stable evolution.
Japanese yen
In contrast with our expectation that the yen should stay above USDJPY 95, the negative sentiment on the equity markets has led to a strengthening of the USDJPY to 92. This is a clear signal that the times of flight to safe havens and dissolution of carry trades are not over yet. The decreasing interest rate difference vs. the USD could have contributed (measured by the 3M Libor, this movement has been mainly caused by decreasing US money market rates). In addition, the uncertainty reflecting the expected exchange rate movements has slightly mounted again for USDJPY (see bandwidths below), in contrast to other currencies. This points to yen strengthening, as reflected in our short-term forecast.
Economic data that exerts a long-term influence on the exchange rate does not necessarily point to a strengthening right now, but attention should be paid to the further evolution. In Japan as well as in the US, signs indicating a recovery are showing up, but we expect a renewed slowdown after a short-lived improvement (see MM Japan, USA).
In the short run, though, financial markets are still dominant - especially equity markets. The correlation of the USDJPY and S&P 500 has been surprisingly strong in the last weeks once again, which is an important factor in the current strengthening. Even though we have repeatedly pointed out the importance of this phenomenon, we want to draw attention once more to the yen’s tendency to strengthen in case of mounting uncertainty or negative sentiment on equity markets; both are still to be expected in the current environment.
