EURJPY – yen stabilizes

EURUSD once again driven by outlook for monetary policy

After the marked decline in the US dollar in the wake of president Trump firing FBI director Comey, EUR/USD has leveled out around the 1.12 level. The further intensification of the affair around alleged contacts between president Trump's campaign team and representatives of Russia thereafter had no further impact on the exchange rate, as the affair has generally moved to the back burner from the perspective of financial markets. Recent monetary policy decisions by the ECB and the Fed did have some effect though. The ECB disappointed market expectations by failing to provide any hints regarding coming reductions of its asset purchases. While the ECB considers the economic situation to have improved, it neglected to signal a change of course and the euro responded by losing a little ground. The Fed turned out to be surprisingly unimpressed by a mixed batch of US economic data, which contributed to a further moderate advance in the US dollar.

We still expect the sideways move in EURUSD to continue in coming months. Our expectations with respect to the future course of monetary policy in the euro zone and the US are not diverging sufficiently from general market opinion to cause us to derive a forecast of a major future move in EURUSD from them. Our view of developments in EURUSD is underpinned by the reduction in political risks. Financial markets are ignoring the ongoing investigations in the US and from today's perspective that would probably only change if impeachment proceedings were initiated against president Trump, which we believe to be highly unlikely. In Europe meanwhile, early elections in Italy this year have become very unlikely as well, hence another source of uncertainty has disappeared. In the longer term we expect the euro to appreciate moderately against the dollar.

JPY – Yen stable vs. the euro

No significant changes with respect to the Bank of Japan's monetary policy stance were announced at its last meeting (16. June 2017). In order to achieve its inflation objective of 2% as soon as possible (most recently inflation rose slightly to +0.3% y/y), the BoJ continues to rely on negative deposit rates, QE (approx. JPY 80 trn. per year), as well as control of the yield curve. The latter means that the BoJ wants to continue to peg 10-year JGB yields near 0%.

Since Mr. Macron's ultimate victory in France's presidential election (in early May), sentiment toward the euro zone has improved markedly. In response to this development the yen initially declined substantially against the euro. However, an ongoing correction in yields on German 10 yr. Bunds, which started in mid May (and as a result of which the yield differential between Japan and Germany has tightened somewhat) generated mild appreciation pressure on the yen. Based on the continuing economic upswing in the euro zone, as well as the expected gradual increase in core inflation rates, we are forecasting a target of 0.8% for 10 year Bund yields by the end of the year. From a fundamental perspective this suggests that the yen should continue to weaken against the euro in coming months, unless the BoJ alters its monetary policy stance.

In the event of a general increase in financial market risks, further appreciation pressure on the yen can nevertheless emerge at any time. Similar to the fundamental backdrop, the technical picture currently argues in favor of the yen weakening further against the euro. The 200 and 50 day moving averages are currently rising, and EURJPY is trading above both. The next resistance area is around the 127 level at the moment. To the downside, we see a strong support area at around 122- 123. The Bloomberg analyst consensus calls for the EURJPY cross to trade at 126 by Q4 2017.

EURCHF – ongoing stabilization after relief rally

On June 15 the Swiss National Bank left the target range for three month Libor in a range of -1.25% to -0.25%, while interest on sight deposits with the central bank was kept unchanged at a negative rate of -0.75%. According to statements by the SNB, the Swiss franc continues to be significantly overvalued. At the same time the SNB remains active in foreign exchange markets if necessary, while taking the overall currency situation into consideration. Negative interest rates and the central bank's commitment to intervene in foreign exchange markets are designed to lower the attractiveness of investing in the Swiss franc, which is supposed to decrease appreciation pressure on the currency.

The SNB has slightly changed its conditional inflation forecast compared to March. In 2017 the SNB now expects an unchanged inflation rate of 0.3%. However, the longer term conditional inflation forecast was slightly lowered. The forecast for 2018 decreased from 0.4% to 0.3%. The forecast is based on the assumption that three month Libor is going to remain at -0.75% over the entire forecasting horizon.

The SNB expects that global economic conditions will remain favorable in 2017. It cautions though that there are still substantial extant risks. The main concerns are political risks, as well as structural problems in a number of developed economies. The SNB is cautiously optimistic with respect to the economic outlook for Switzerland in 2017. The central bank's GDP growth estimate for 2017 was maintained at around 1.5%.

Since Mr. Macron's victory in the French presidential election there was a strong decline in the Swiss franc against the euro, as investor confidence toward the euro zone improved quite significantly. In the short term a new trading range in EURCHF between 1.085 and 1.09 appears to have been established. We continue to forecast a mild decline in the Swiss franc vs. the euro over the rest of the year, to a level of around 1.10 by Q4 2017. However, a minimum exchange rate is no longer enforced. Should certain risks emerge (e.g. geopolitical conflicts, turmoil in the EU), the Swiss franc could once again appreciate rapidly and strongly.

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