Dollar: No signals from the Fed expected
CHF: Strengthening continues
Yen: Stronger again
US dollar
The EURUSD exchange rate has been quite stable in the past weeks, very much like after mid-December, fluctuating within a narrow band around 1.44. The break-out above 1.45 was only of temporary nature. Even worsethan- expected US economic data caused a stir only for a short while. One explanation in the market was that the concerns over the Greek budget were burdening the euro at the same time.
Whether this should really be a decisive factor for the foreign exchange rate is at the very least up for discussion, given that the problems in Greece are not representative for the Eurozone. Apart from that the most recent US data confirmed that the US economy was gradually recovering, yet from very low levels. The Fed will therefore see no reason to increase interest rates for the time being. This means that interest rate expectations will hardly determine the exchange rate. The next meeting of the Open Market Committee of the US central bank on 26 and 27 January will confirm this. The central bank will continue to signal low interest rates. We do not expect any statements concerning liquidity management. Those should be made at the earliest at the meeting in March, after Bernanke has been approved for a second term by the US Congress in February. We expect the first interest rate hike by the Fed for the third quarter at the very earliest. So while we do not expect any events in the foreseeable future that would push the dollar in either way, we think that the downside risks outweigh the upside potential for the US currency. Because the situation has not changed: the US deficit will increase massively this year and in the coming ones, and there are considerable uncertainties about the medium-term effects of the extremely expansive US monetary policy.
Swiss franc
There has not been much news concerning the Swiss franc. The strengthening trend continued and should prevail for some time. Indeed, the SNB will only counteract an excessive strengthening, implying that a moderate short- to medium-term strengthening of the Swiss currency is possible. As soon as the first ECB rate hike is in sight, though, this should support the euro and thus provoke a weakening of the franc – but we would not count on that before the middle of the year.
Japanese yen
The yen has – as expected – interrupted the weakening in the short term. A countermovement brought the exchange rate close to USDJPY 90 once more. Big oscillations in both directions of the exchange rate are no news. The additional expansion of the monetary aggregate, which had been decided in December and aims at an easing of credit conditions, could have contributed to the previous weakening. This means that the BoJ is currently the only central bank continuing to ease monetary policy further, in contrast to the Fed, the ECB and the SNB, which do not plan to expand their measures further. This asymmetry implies that rates should be low for a longer time in Japan than abroad, which could in turn lead to a shift of carry trades in the yen again. The new Finance Minister Kan already mentioned that he would be happy with a weaker yen. Even if the central bank would not intervene directly on the FX markets (the direct purchase of FX against the yen would be the most efficient way to weaken the Japanese currency), a further expansion of the monetary aggregate – for example via the purchase of JGBs – would influence the exchange rate too. All this points to a weakening of the yen in the medium term and we expect the exchange rate to quote within USDJPY 90 to 95. In the short term, though, countermovements (like the one seen lately) can always show up.
