US dollar
The dollar continued to depreciate over the past weeks, taking the US currency to a new year-low against the euro. EURUSD has not reached 1.5 yet, but it seems only a matter of time before the euro will be traded at above 1.5 US dollars. We cannot see any factors at this point in time that could put an end to the current trend. As for the immediate future, the next important macro data are only due for the beginning of November, which means we do not expect any impact from that side in the coming weeks. Nothing much will change in the underlying reasons for the weakness of the dollar in the foreseeable future. The massive increase in public debt this year and in 2010 (albeit from a relatively low level) together with the expansive monetary policy of the central banks harbour risks that fail to encounter proper compensation through interest rates. Among the risks is the fact that the USA will depend on foreign capital to finance its budget deficit, and that the normalization of monetary policy (exit strategy) will be difficult. The central bank cannot withdraw the liquidity too early, or else it would stifle the economy, but not too late either, because this could generate higher rates of inflation in the long run. All these risks will also be omnipresent in the markets in 2010. This means the depreciation of the US dollar should therefore not come to a halt because of any improvement of the situation in the USA, but rather due to the negative implications resulting from it for the economy of Euroland. EURUSD should therefore settle at around 1.55 towards the end of the year, with a temporary overshooting of this mark not out of the question.

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Swiss franc
There is not much news from the EURCHF exchange rate, which remains stable at 1.51, and there do not seem to be many reasons for a departure from this value. On one hand, inflows into the franc seem to persist; on the other hand, the SNB is generously providing liquidity in order to avoid a strengthening of the franc. We think that this will go on for some more time and that a policy change would have to be preceded by a definite all-clear from the financial sector and the economy. The franc would most likely start to weaken when the first rate hikes by the ECB are in sight, but that is not imminent. Thus, we expect the SNB to pursue an expansive course in the near future too, implying a stable franc.

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Japanese yen
The anticipated strengthening of the yen has led to an exchange rate of USDJPY 88. Even though the yen has weakened again in the meantime, the exchange rate volatility remains quite high. The export data for the first 10 and 20 days of the month show a significant increase of Japanese exports in September, which could cause renewed yen strengthening, even beyond USDJPY 88. Until now, this magic barrier has not been crossed during the crisis, but this need not be the case in the future. Finance Minister Fuji, who had at first mentioned that he was not against a strong yen, recently commented on the exchange rate in a cryptic way. When meeting US Treasury Secretary Geithner, he told him it's acceptable for the dollar to strengthen, and Geithner told me he wants a strong dollar. Even though this formulation is quite passive, we think that, in the case of significant yen strengthening, the government would prompt interventions (see Forex News of 6.October). Hence, the all-clear cannot be given for a possible yen strengthening. In the short term, the exchange rate will most likely oscillate with large departures around USDJPY 90.

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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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