Better-than-expected US economic data have helped the US currency appreciate clearly against the euro since the beginning of the month. At first, there were the labour market data, which did not only show a decreased unemployment rate but also only few job cuts anymore. A week later, retail sales substantially exceeded the growth rates that had been expected by the market. However, this changed interest expectations priced in only to a minor agree, given that the low base level of economic output requires a longer phase of solid economic data before interest rates could be raised again. But for the EURUSD exchange rate, these data have still been decisive in recent weeks. The depreciation of the dollar had been stalling for a while anyway, although we had still expected the trend to continue. For now it seems the stronger side of the US dollar will be tested. The appreciation of the dollar should continue in the coming weeks. But we think that this is only a temporary phase, because the rapidly rising US government debt and the extremely expansive policy of the central bank have not changed. The data of the US economy will not point up straight as an arrow either, rather they will exhibit quite a degree of fluctuation. The third quarter 2010 is the earliest point in time that the US economy might have stabilised enough for the Fed to re-evaluate its monetary policy, and it is only then that we expect the US dollar to start posting sustainable gains.
At their last meeting, the SNB decided as expected to continue the expansive monetary policy. The target rate for the 3M Libor has been left unchanged, as well as the generous provision with liquidity and FX interventions. Only the purchase of franc-denominated bonds of private issuers has been stopped; as this measure is tiny in comparison to the other measures, this should bear no real consequences. Thus, the last decision was merely symbolic, in order to reinforce the stance of the SNB to act decidedly and rapidly if necessary. Markets reacted with an increase of the 2W implicit volatility the next day, but the increase has been recouped since then, as the EURCHF remained stable. The economic outlook has been revised upwards, while the inflation outlook remained unchanged. Based on the latter, we expect the first rate hike only at the end of 2010, in order to support price stability in the medium term. But this step has to be preceded by the first hike of the ECB in order to avoid additional strengthening pressures on the franc. The exchange rate will also play a decisive role in the timing of the exit from the alternative measures. Of particular interest in this context is the statement by SNB council member Jordan concerning the implementation of the SNB’s exit strategy. While foreign currency from the FX interventions and the bonds purchased are planned to be kept on the SNB’s balance sheet for an “extended period of time”, the excessive liquidity should be absorbed by emitting SNB bills in the future. We expect persistent strengthening pressures on the franc, implying a continuation of the SNB’s interventions as well.
The yen has returned from its previous highs, reaching USDJPY 90, but remains highly volatile. We expect the yen to remain strong throughout 1Q10, accompanied by large fluctuations. The main reasons for this are the extremely low rates in the US and strong export growth in Japan. Both effects should start to abate in the second quarter, though, pointing to an exchange rate close to USDJPY 90 to 95. For EURJPY, this implies (combined with our EURUSD forecast; see above) a slight weakening of the yen. Due to the deflationary environment in Japan, we do not expect any rate hike in the foreseeable future.
Bandwidths for next two weeks
The following bandwidths were prepared based on market estimates of future exchange rate risks. Starting with today’s exchange rate, an upper and a lower limit can be estimated for the exchange rate two weeks from now. This covers the most likely scenarios. We have compared the forecasted bandwidth with the actual exchange rate in a chart. The markets expect much wider fluctuations in the future than seen in the past as well, although we have noticed a decline most recently. Thus, the forecasting risk has increased.
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