EURCHF – Swiss franc should continue to decline moderately

EURUSD – Data confirm appreciation potential of the US dollar

EURJPY – Yen weakens

EURCHF – Swiss franc should continue to decline moderately

US trade policies unsettle marketsIn

July EURUSD by and large continued its trend of June and traded in arange from 1.16 to 1.18. Thus the consolidation phase continued – probablydriven by the summer doldrums. Another important factor was the newsflow on US tariffs on imports from China and EU, which changed on a dailybasis, and triggered uncertainty with respect to the potential impact on theeconomies of the US and the euro zone.

We are sticking to our assessment that the dollar has further appreciationpotential and recent economic data releases reinforce our conviction. Dataon GDP growth in the second quarter are not available yet, but monthlyindicators suggest that a doubling of the (modest) growth rate posted in thefirst quarter should be expected. The impact of tax cuts and higher publicspending is becoming obvious. We do not expect that the trade disputes willresult in a significant slowdown in US economic growth, although a potentialescalation cannot be ruled out. We expect two more rate hikes in the USthis year, followed by further hikes next year. At the same time there will notbe any noteworthy speculation on rate hikes in the euro zone for the timebeing in our opinion, as the ECB has just committed itself at its Junemeeting to leave administered interest rates unchanged at least through thesummer of 2019.

JPY – Yen weakens

After the political upheaval in Italy had slightly cooled off, the yen lost groundagainst the euro. A relatively muted trend in inflation relative to the euro zonesince April had already supported the yen (on account of real yield differentials)earlier. In addition, relative trends in producer prices in Japan and the euro zonesupported the yen moderately since the beginning of the year. However, theinflation forecasts of BoJ and ECB for 2019 on the other hand point to astrengthening of the euro next year. In view of disappointing developments onthe inflation front (+0.7% y/y in May) as well as weakening economic growth(+1.1% y/y in Q1 2018), the BoJ stressed at its last meeting that it remainsconvinced that it is essential that it maintain an expansionary monetary policy.These statements should not change significantly at the next meeting (30-31July) either, even though the first leading indicators of Japan's economy releasedin July have shown improvement.

As we continue to forecast a gradual increase in the yields on long term Germangovernment bonds, the yen should be expected to weaken against the euro incoming months, provided the BoJ does not materially alter its monetary policy.However, the muted trend in Japanese inflation represents an element ofuncertainty for this forecast. From a technical perspective the Euro-Yen crossrate is at the lower end of a trading range between 129.5 and 132. TheBloomberg analyst consensus is calling for EURJPY to trade at 130 by Q4 2018.

EURCHF – The Swiss franc should continue to decline moderately

As the initial commotion over the new government of Italy has gradually peteredout and risk premiums on Italian government bonds decreased, the Swiss francweakened slightly against the euro. Despite simmering trade disputes we believethat market participants will increasingly focus on fundamentals again. At itsmeeting in June the Swiss National Bank left the target range for three monthLibor between -1.25% and -0.25%, while interest on sight deposits with thecentral bank was kept unchanged at a negative rate of -0.75%. According to theSNB, negative interest rates in conjunction with the central bank's willingness tointervene in foreign exchange markets remain essential due to the fragilesituation in foreign exchange markets. The fact that the rate of change ofproducer prices (excluding energy) in Switzerland has caught up with the trend inthe euro zone is favorable for the euro from a fundamental perspective.

Uncertainty surrounding the ongoing trade dispute has eased somewhat over thepast weeks, which has supported the euro against the Swiss franc. As long asprotectionist measures and/or political tensions don't escalate, we expect theglobal economic upswing to continue. In this environment we are forecasting agradual, moderate depreciation of the Swiss franc vs. the euro to around 1.17 byQ4 2018. However, a minimum exchange rate is no longer enforced. Shouldcertain risks materialize (e.g. geopolitical conflicts, intensification of the globaltrade conflict, or turmoil in the EU), the Swiss franc could once again appreciatestrongly and rapidly.

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