USD weaker – but short-term resistance at EURUSD 1.429
EURCHF stable
Yen under influence of equity markets
US dollar
In the past two weeks, the euro strengthened vs. the US dollar by 2.4% to reach a level of 1.429. The US reporting season surprised to the upside, and the strong performance of the equity markets implied by the positive results is currently weakening the dollar, which is perceived as a safe haven in turbulent times.
Furthermore, the euro is supported by the better than expected economic data in the Eurozone. May’s industrial production and new orders have reflected the slowdown of the economic downturn, which was preceded by an upturn of sentiment indicators. Thus, market participants trust the leading quality of last week’s positive indicators as well (Germany’s business climate and PMIs for July, GfK Consumer Confidence for August). As a consequence, investor sentiment for the Eurozone is increasingly optimistic, supporting in turn the euro vs. the dollar. In the short term, though, the current level of 1.429 (this year’s high) could imply a certain resistance.
On Friday, the flash estimate for US 2Q GDP will be released. As the reading should confirm the US stepping out of the recession, investors’ risk appetite could increase further during the next few days, thus weakening the dollar at first, until the weakest level since Lehman (1.4356) comes into testing range.
Swiss franc
The SNB’s strategy to stabilize and avoid a possible strengthening of the franc remains successful. Markets seem to increasingly ‘trust’ this evolution, which is reflected in a lowering of expected exchange rate movements, pointing to less speculation about big departures from the current level of the exchange rate.
In our opinion, strengthening pressures on the franc persist, as the currency is perceived as a safe haven and probably continues to attract investors’ money. In contrast, SNB interventions tend to avoid a strengthening of the Swiss currency, supplying the markets with sufficient liquidity in francs. Thus, we continue to expect a sideways movement of the EURCHF exchange rate.
Japanese yen
At the same time as the improvement on the equity markets, which might have been related to the reporting season in the US, the yen has weakened (according to the safe haven logic) to reach USDJPY 95. This is the level we have assessed as being approximately ‘fair’ (cf. Currency Models USDJPY).
In their last country report, the IMF also referred to levels between USDJPY 95 and 98 as ‘consistent with medium term fundamentals’, implying that possible interventions to weaken the yen should be avoided. These would only be appropriate to counter ‘disruptive’ exchange rate movements (strengthening, in particular).
Hence, we think that there is still some strengthening potential arising (especially) from a possible deterioration on the equity markets. Surprises from economic releases (GDP data is ahead) could contribute to exchange rate movements as well.
In the mid term, we stick to our expectation of USDJPY 95 (until 98), even though the coming economic data could lead to a reassessment of prevailing influences and their effect on the exchange rate.
