Dollar appreciation not lasting
CHF: Moderate strengthening
Yen: (Excessively?) rapid weakening
US dollar
After strong gains in the first weeks of December the US dollar embarked on a sideways trend against the euro. The technical EURUSD mark of 1.43 was tested but not broken, and most recently EURUSD was traded slightly around 1.44 again. All in all we regard the most recent appreciation of the US dollar as a temporary one. Although recent US economic data confirm the recovery of the US economy, the base level of the upswing is so low that it is a long way to any interest rate hikes, which means that the future path of interest rates remains associated with significant uncertainties.
Indeed, we and a number of other market participants expect the US economy to slow down during the coming quarters, given that the current dynamics are crucially supported by temporary factors. Among those are the economic stimulus packages by the governments as well as the inventory cycle. This means that interest rate expectations should remain subdued and thus should not be the decisive factor for the exchange rate for the time being. Instead, the well known burdening factors should return to centre stage. These factors, as mentioned in past issues of Forex News are the high budget deficit of the USA and the extremely expansive route of the US central bank. Both are risks to the medium term value of the dollar and should push EURUSD back above 1.5 once the current correction is over.
Swiss franc
The SNB had prepared the way for the exit from the expansive monetary policy symbolically. The decision to stop the purchase of CHF bonds had only little effect on their balance sheet. The announcement of plans to counteract an excessive (previously: further) strengthening of the franc was matched a few days later in a strengthening to EURCHF 1.48. This implies that the “barrier” of EURCHF 1.50, which had held thanks to interventions by the SNB, broke down and is no longer a barrier. We think that the SNB will continue to intervene, but tolerate a moderate strengthening of the franc. The bank had been left additional room for maneuver, as the Swiss economy was hit far more softly by the crisis than other countries (which in turn reduces deflationary risks) and as the franc had weakened vs. the US dollar recently. Our assessment of the interest rate path remains unchanged (we expect the first move following the ECB in the fourth quarter), but on the exchange rate side we now see a risk of a moderate strengthening in the months to come. Strengthening pressures on the franc should prevail at least as long as the ECB continues its relatively expansive policy, but the SNB should be intervening to a smaller extent than in the past.
Japanese yen
The yen has weakened earlier than we expected and to a greater extent, reaching USDJPY 92. This is partly the correction of a previously excessive strengthening (an exchange rate of USDJPY 90 would have been roughly in consonance with the economic evolution, such as export growth). The dominant factor seems nevertheless to be the forthcoming exit strategy of the US Fed. The stop of purchases by the Fed might have contributed to the recent increase in yields, implying an increase in the yield differential too. This and (more basically) the fact that the provision of liquidity will not be extended any further could lend support to the US dollar vs. the yen. We had expected that the exchange rate would only move when interest rate hikes came into sight, but markets may already prefer the structurally lower yen rates for carry trades. Thus, the expected weakening of the yen to USDJPY 90-95 could set in earlier than expected. As the volatility of the yen is extraordinarily high, however, we also expect counter-movements, in particular as Japanese exporters will repatriate their earnings before the end of the Japanese fiscal year in March, and will therefore not adapt our forecasts immediately.
