EURUSD hardly reacts to recent data
Franc: Moderate strengthening continues
USDJPY still close to 89
US dollar
EURUSD has stabilised around 1.35 over the past weeks. The economic data on both sides of the Atlantic have been slightly disappointing, with the expectations for the US marginally more ambitious. The more or less subdued interest rate outlook by the Chairman of the Fed did not dent the US dollar either. The Greek budget crisis has at least not worsened. Currently the markets are waiting for further austerity measures from the Greek government that are supposed to be announced this week. At the end of the week the Greek Prime Minister will meet with the German Chancellor, and hopes are they might sort out the details of a support programme; at the latest, however, this might happen at the middle of March when the EU Ministers of Finance will be discussing the Greek austerity proposals.
Whether a credible solution of the Greek crisis will cause the euro to appreciate remains to be seen. The uncertainties triggered by the budget development of other EU countries could prevent any rise in the euro for the time being. At the same time, however, a convincing way of handling the Greek crisis could increase the confidence in the monetary union. In the medium term we regard US public debt, which is increasing at a higher rate than in the Eurozone and for which the investors are not compensated by adequate levels of economic growth and thus by rising interest rates soon, as decisive factor for the weakening of the dollar ahead.
Swiss franc
We expect a further moderate strengthening of the franc. Today’s release of Swiss GDP was above market expectations (it implies a growth rate for 2009 of -1.4%, while we expected -1.5%) and clearly more positive than for most Eurozone countries, and we expect a better evolution in Switzerland for next year as well. Furthermore, the current worries about state debt in the Eurozone are in sharp contrast to Switzerland’s good position.
Strengthening pressures, which are likely triggered by the dissolution of carry trades, should prevail, and even after that, it should take some time until the interest rate differential gains importance again. In our view, the likelihood that the first interest rate hikes of the ECB and the SNB are postponed until 2011 has increased, leaving few reasons for a weakening of the franc until then. Even after the interest rate hikes, it could take some time until they feed through to the exchange rate, as the availability of francs for market participants willing to take advantage of the rate differential is currently strongly supported by the SNB, which could abate somewhat. The bank is still intervening and has almost doubled the balance sheet since the onset of the crisis, and we expect a continuation of the interventions to avoid an excessive strengthening of the franc, as long as strengthening pressures persist. This could last until the end of the year, leading us to revise our forecasts towards a stronger franc (the next Forex News will contain our new forecasts until March 2011).
Japanese yen
The yen is still close to USDJPY 89. The surprising decision by the Fed to hike the discount rate had led to a shortlived weakening of the yen, which was reversed as soon as the publishing of Bernanke’s testimony, in which he said that rates should remain low for an extended period of time, thus dampening speculations about a sooner than expected rate hike. The weak economic data also point to the first rate hike perhaps coming later than expected.
We think that the yen will only weaken once the first rate hike in the US is imminent, which could still take some time.
