Dollar gains further
Franc: Moderate strengthening expected
USDJPY returns to 90
US dollar
The US dollar has remained on its upward path against the euro since the beginning of the month. However, in the past week the EURUSD rate has settled at 1.36. An end of the appreciation trend would depend in the short term on numerous factors. The most obvious one is the question of how the crisis in Greece will be coped with, i.e. to what extent the markets can be convinced of the consolidation of the budget. At the same time, however, the appreciation of the US dollar seems exaggerated – unless investors were to expect the country to default and other Eurozone countries to follow suit. We believe that, while the development in Greece is certainly a first in the Eurozone, it does not justify the depreciation of the euro at its current extent. In fact we think the underlying reason for the strong US dollar was the previously lopsided positioning of the market participants against the dollar last year. Parts of these positions now have to be settled, and the events in Greece are playing into this trend. Without a doubt, the strong movement of EURUSD since the beginning of December has come as a surprise to us and many others on the market, and it will not be easily forgotten. But this should only dampen any new depreciation of the US dollar rather than prevent it altogether, given that the problems the USA has with its budget have only temporarily been taken to the sidelines because of Greece, but they have not disappeared. The draft budget of the President allows for a deficit of 10.6% in terms of GDP this year after 9.9% in 2009. Therefore we expect the US dollar to depreciate again, but less substantially so than previously assumed.
Swiss franc
In consonance with the announcement made in December that it would only counteract an excessive strengthening of the franc, the SNB has allowed the Swiss currency to appreciate moderately. Still, a substantial weakening of the franc can be detected repeatedly, pointing to interventions by the bank. Thus, we think that strengthening pressures will prevail (one reason being the ongoing dissolution of carry trades of any kind), but that these will be attenuated by the SNB, resulting in a moderate strengthening of the franc throughout the year. In the longer term, the expected increase of the interest rate differential vs. the euro should lead to a weakening of the franc, but there is still some time left until then.
Japanese yen
The yen has strengthened again and remains close to USDJPY 90 (our forecast for March). Thus, in our view, the risks are balanced at present. On one hand, weaker economic data from the US or relatively strong growth in Japan (which is to be expected on a y/y basis, as base effects will gain importance in the first quarter) could lead to the yen strengthening. On the other hand, better economic data in the US as well as interest rate expectations could lead to an earlier weakening of the yen. In the mid term, higher rates in the US, as well as the expected reduction of liquidity in the US, should imply a yen weakening vs. the US dollar.
