EURJPY – Yen continues to weaken

EURUSD – Strengthening expected ahead of first US rate hike

EURJPY – Yen continues to weaken

EURCHF – Tensions in euro zone are keeping Swiss franc firm

Strengthening of US dollar expected ahead of first US rate hike

Over the past few weeks EURUSD has fluctuated between 1.10 and 1.14. Opposing influences have capped the exchange rate in both directions.
Overall rather weak economic data in the US and strong economic data in the euro zone had a dampening effect on the dollar. At the same time, this didn't alter the medium term outlook for monetary policy, which lends support to the dollar. In the US, the Fed will soon begin to hike rates, while in the euro area, the ECB is going to provide liquidity to the markets for the foreseeable future and a rate hike is definitely not on the horizon. We expect economic data in the US to improve in coming months. This should lend support to rate hike expectations and lead to a strengthening dollar.
The dollar's upside potential should however be limited, as we also expect a continuation of the economic recovery in the euro zone, which should buttress the euro. All in all we therefore expect a sideways move in EURUSD between 1.05 and 1.10 in the second half of the year. The effects of a further escalation of the Greek crisis are difficult to assess. That Greece will stay in the euro zone remains the most likely outcome in our opinion. The events of recent days have however increased the risk of Greece leaving the euro zone. Current exchange rates already reflect the probability of a Greek exit to some degree, however, a short term rally in the dollar would be the most likely market reaction in the event Greece departs, the extent of which we would estimate to amount to a few percentage points. However, over a time horizon of several months we believe that the above mentioned fundamental factors will have the greatest impact on the exchange rate.

JPY – Yen continues to decline due to the ongoing increases in euro zone bond yields

Japan's economy delivered a positive surprise in the 1st quarter with growth of 1.0% q/q. Growth was largely driven by strong private consumption (+0.4% q/q) as well as brisk investment activity (+1.6% q/q). Indicators released so far are pointing to a continuation of economic growth in the 2nd quarter. Consumer confidence has continued to improve relative to the 1st quarter average, which indicates moderate growth in consumption. The manufacturing purchasing managers index picked up slightly in May and has risen above the important threshold of 50 (indicating growth in industrial production).

Inflation (adjusted for the effects of the April 2014 sales tax hike) has declined to 0% in April (previously 0.2%). Due to the dampening effect of low energy prices, Bank of Japan (BoJ) board members currently expect that the price stability target of 2% will only be reached in the course of the first half of 2016 (previously in the course of 2015). At the last meeting in April a clear majority of the BoJ's board has voted for an unchanged continuation of the asset purchase program (JPY 80 trn. p.a.), until the price stability target of 2% is attained.

Over recent weeks the yen has continued to weaken against the euro (a move from 134 to 139). The move occurred largely simultaneously with the ongoing rise in bond yields in the euro zone. Both monetary policy (currently both the ECB and BoJ are engaged in quantitative easing) and yield levels in the two currency areas will be decisive for future trends in the exchange rate. The ongoing rise in yields in the euro zone enhances the euro's attractiveness in this respect, whereas the faster pace of the ECB's asset purchases relative to those of the BoJ is in principle arguing against euro strength. The technical picture is mixed. EURJPY is currently trading above the moderately declining 150-day moving average. The 140 level has so far represented a resistance level for the exchange rate, should this level be exceeded, a further slump in the yen toward the 150 level seems possible. In the short term the 127-130 zone caps the yen's upside potential. The analyst consensus currently expects the cross to stabilize around the EURJPY 135 level in 2015.

EURCHF – tensions in the euro zone are keeping the Swiss franc firm

Yesterday the SNB has left interest rates unchanged, with the target corridor for three month LIBOR at -1.25% to -0.25%, and the rate on sight deposits held with the central bank at -0.75%. According to the SNB, the Swiss franc overall remains “significantly overvalued”. The SNB notes that in shaping its monetary policy, it takes the exchange rate and its influence on inflation and economic developments into account, and hence remains active in the foreign exchange markets if necessary, so as to influence monetary framework conditions. The SNB has also slightly adjusted its conditional inflation forecast. Inflation rates of - 1.0% and -0.4% are expected in 2015 and 2016 respectively, 0.1 percentage points higher than in the March forecast. For 2017, the SNB's inflation forecast has been lowered by 0.1 percentage points to 0.3%. In contrast to the SNB, SECO expects a positive inflation rate of 0.3% in 2016 already. Its forecast for 2015 is in line with that of the SNB at -1.0%. Adjusting to the strong Swiss franc has been painful for the Swiss economy. Real GDP declined by 0.2% q/q in the first quarter of 2015. The SNB nevertheless expects annual growth of approx. 1%, while SECO has adjusted its forecast slightly downward (2015: 0.8%, 2016: 1.6%). The SNB expects that the global economy, supported by worldwide expansionary monetary policy and lower oil prices, will pick up in coming months. This should also have a positive effect on the Swiss economy's trend.

Currently the unresolved situation surrounding Greece is lending support to the Swiss franc. The once again wider inflation differential between Switzerland and the euro zone and the high level of deposits are exerting short term upward pressure on the Swiss franc. However, over the past two weeks a slight weakening relative to previous months can be observed. Fundamental factors continue to point to a somewhat weaker Swiss franc in the long term. For the time being we maintain our forecast for EURCHF to remain in a range from 1.05 to 1.10 in the third quarter of 2015 and expect that the Swiss franc will moderately decline over the course of the year. However, there is no longer a minimum exchange rate. Should risks manifest themselves (e.g. geopolitical conflicts, turmoil in the euro zone), the Swiss franc could once again strengthen rapidly and strongly.