20 July 2010

Forex News
USD CHF JPY

Slowdown of economic recovery dampens

USD

EURCHF: Ongoing uncertainty

Fed rate hike expectations further postponed -

yen strengthens further
Forex News – Macro/Fixed Income Research – 20 July 2010

US dollar Analyst: Gudrun Egger

gudrun.egger@erstegroup.com

Worries about a slowing US economy seem to be eating into the confidence of the financial markets in the US
dollar. It has lost about 3% against the euro in the past two weeks, with the euro passing the EURUSD 1.30 mark.
While the Eurozone has to deal with its own share of bad news, such as the downgrade of the Irish rating by
Moody’s from Aa1 to Aa2, i.e. by one notch, these do not seem to attract much attention for the time being. That
said, the markets have been eagerly awaiting the release of the pan-European bank stress test, which is scheduled
for Friday evening.

The issue of economic growth seems to have replaced public debt as the topic of choice on the financial markets.
Countries with higher growth potential could basically afford higher debt, given that this will allow them to stabilize
or indeed reduce the level of debt more easily in the future. The growth potential of the US is higher than that of the
Eurozone, which is probably one of the main reasons why the US has not announced any steps towards budget
consolidation yet, whereas some Eurozone countries have come under great pressure to swiftly consolidate their
public budgets. However, since the economic outlook in the US is currently somewhat slowing down, whereas
there is hardly any risk for disappointment in this context in the Eurozone, the sentiment vis-à-vis the US could
worsen further in the short run, in view of the high budget deficit. For the coming weeks and months, we still expect
the US dollar to depreciate slightly against the euro to around 1.35. But in the medium term, both currency areas
will have to cope with their own problems, and the influencing factors should be of a less sentiment-driven nature.

Swiss franc Analyst: Mildred Hager

mildred.hager@erstegroup.com

The euro has strengthened to EURCHF 1.365, implying that, once more, a breakthrough of the exchange rate
through the bandwidths shown on the next page was followed by a countermovement. Nevertheless, the risk of
renewed Franc strengthening has not totally disappeared. It should be taken into account that interventions have
been stopped for the time being and renewed turmoil on the financial markets could lead to safe haven flows to the
franc. The franc has appreciated vs. the US dollar, too, and remains close to parity. The question now is to what
extent the stronger franc will impact the Swiss economy. The CPI decreased in June vs. May, but inflation remains
close to 1%. Exports increased by value in June, but decreased m/m on a real seasonally-adjusted basis. Thus, the
exchange rate might have had an effect, even though this is hard to distinguish from the direct influence of the
economic situation abroad. The question remains if and when the SNB might make out renewed deflationary
threats for Switzerland and take all necessary measures. As the bank has already expanded its balance sheet
significantly in the past, this might only happen in extremis. The outlook for the EURCHF exchange rate is still
accompanied by such high uncertainty (even though some improvement could be seen in the last few days) that
we stick to bandwidths for the forecasts. On one hand, there still seem to be enough factors supporting
strengthening pressures on the franc. On the other hand, it should be taken into account that the franc is currently
quoting at historically very strong levels, implying that part of the latest strengthening might have been short-term
and sentiment-driven. The extent of the last movements has proved in an impressive way the extent to which
extreme events can be beyond expectations, which is particularly true in the currently extraordinary market
environment.

Japanese yen Analyst: Mildred Hager

mildred.hager@erstegroup.com

The mean expectations for the first interest rate hike of the US Fed were postponed once more (to 2Q11) in July, a
Bloomberg survey shows. In consonance with that, the yen has strengthened further vs. the US dollar, even
thought the extent of the strengthening has been surprising: the USDJPY reached last year’s low of 86.3. The BoJ
has revised its growth expectations for 2010 upwards. At the same time, worries about the US economy, especially
the labor market situation, seem to have gained in importance. The nominees for the Federal Reserve Board,
Yellen and Raskin, mentioned worries about the labor market, and the latter even stated that the Fed should put
more focus on the employment situation. In addition, in the minutes of the June 22-23 meeting, a few participants
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 1
1.1
1.2
1.3
1.4
1.5
1.6
1.7

1.1
1.2
1.3
1.4
1.5
1.6
1.7
01.08.2008
15.08.2008 15.08.2008
29.08.2008
12.09.2008
26.09.2008
15.10.2008 10.10.2008
24.10.2008
07.11.2008
21.11.2008
15.12.2008 05.12.2008
19.12.2008
02.01.2009
16.01.2009
15.02.2009 30.01.2009
13.02.2009
27.02.2009

EURCHF
13.03.2009
15.04.2009 27.03.2009
10.04.2009
24.04.2009
08.05.2009
15.06.2009 22.05.2009
05.06.2009

15.08.2009
19.06.2009
03.07.2009
foreseeable in the US.
17.07.2009
31.07.2009
14.08.2009
28.08.2009

EURUSD
15.10.2009

EURCHF
11.09.2009
25.09.2009
09.10.2009
15.12.2009 23.10.2009
06.11.2009
20.11.2009

95%-Bandwidths for 2W EURCHF

04.12.2009
15.02.2010 18.12.2009
01.01.2010
15.01.2010
29.01.2010
15.04.2010 12.02.2010
26.02.2010
12.03.2010
26.03.2010
15.06.2010 09.04.2010
23.04.2010
07.05.2010
21.05.2010
04.06.2010
18.06.2010
02.07.2010
16.07.2010
30.07.2010

70
80
90
100
110
120
01.08.2008
15.08.2008
29.08.2008
Bandwidths for next two weeks

12.09.2008
26.09.2008
10.10.2008
24.10.2008
two weeks from now. This covers the most likely scenarios.

07.11.2008
21.11.2008
05.12.2008
19.12.2008
02.01.2009
16.01.2009
30.01.2009
13.02.2009
27.02.2009
13.03.2009
27.03.2009
10.04.2009
24.04.2009
08.05.2009
22.05.2009
05.06.2009
Forex News – Macro/Fixed Income Research – 20 July 2010

19.06.2009
fluctuations in the future as well. Thus, the forecasting risk has increased.

03.07.2009
17.07.2009
31.07.2009
14.08.2009
28.08.2009
USDJPY

11.09.2009
25.09.2009
09.10.2009
23.10.2009
06.11.2009
20.11.2009
04.12.2009
18.12.2009
01.01.2010
15.01.2010
29.01.2010
12.02.2010
26.02.2010
12.03.2010
26.03.2010
09.04.2010
23.04.2010
07.05.2010
21.05.2010
04.06.2010
18.06.2010
02.07.2010
16.07.2010
30.07.2010
The following bandwidths were prepared based on market estimates of future exchange rate risks (implicit

We have charted the forecasted bandwidth with the actual exchange rate. The markets expect much wider
return above USDJPY 90, even though a significant weakening should only be seen as soon as rate hikes are
in the markets about the future development of the US economy (and thus interest rates), the yen could remain

volatility). Starting with today’s exchange rate, an upper and a lower limit can be estimated for the exchange rate
close to the currently strong levels below USDJPY 90, or even strengthen further. In the medium term, we expect a
cited some risk of deflation in the US. Both might have impacted interest rate expectations. As long as fears persist

Page 3
Forex News – Macro/Fixed Income Research – 20 July 2010

EURUSD 3m US Libor and Spread to Euribor

6
1.7 USD 3m Libor
1.6 Spread to Euribor
4
1.5
1.4
2
1.3
1.2
0
1.1
1
-2
0.9
0.8 -4
Jul.08 Dez.08 Mai.09 Okt.09 Mär.10 Jul.08 Dez.08 Mai.09 Okt.09 Mär.10

EURJPY 3m JPY Libor and Spread to Euribor

180 2
170
160 0
150
140
-2
130
120
-4
110 JPY 3m Libor
100 Spread to Euribor
90 -6
Jul.08 Dez.08 Mai.09 Okt.09 Mär.10 Jul.08 Dez.08 Mai.09 Okt.09 Mär.10

EURCHF 3m CHF Libor and Spread to Euribor

1.7 4
CHF 3m Libor
1.65
Spread to Euribor
1.6 2

1.55

1.5 0

1.45

1.4 -2

1.35

1.3 -4
Jul.08 Dez.08 Mai.09 Okt.09 Mär.10 Jul.08 Dez.08 Mai.09 Okt.09 Mär.10

Page 4
Forex News – Macro/Fixed Income Research – 20 July 2010

Forecasts: Exchange Rates

End of Month Current Sep-10 Dec-10 Mar-11 Jun-11
EURUSD 1.288 1.30 1.35 1.33 1.30
EURJPY 111.8 117.0 124.2 126.4 126.1
USDJPY 86.81 90.0 92.0 95.0 97.0
EURCHF 1.352 1,25 - 1,4 1,2 - 1,45 1,2 - 1,45 1,15 - 1,5

Forecasts: 3m interest rates

End of Month Current Sep-10 Dec-10 Mar-11 Jun-11
EURO 0.87 0.90 1.00 1.20 1.50
Japan 0.24 0.25 0.25 0.25 0.25
USA 0.52 0.60 0.80 1.00 1.30
Switzerland 0.12 0.25 0.25 0.50 0.50
Spread vs Euribor -0.75 -0.65 -0.75 -0.70 -1.00

Appendix: EURCHF fan chart

The following chart illustrates expected exchange rate movements of the EURCHF. Based on option prices for
different maturities and strike prices, an implicit probability distribution function can be estimated for the different
horizons. This in turn permits the estimation of bandwidths within which the exchange rate is expected to quote
with a certain probability. We plot the bandwidths corresponding to 50%, 70% and 95%.

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Forex News – Macro/Fixed Income Research – 20 July 2010

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Forex News – Macro/Fixed Income Research – 20 July 2010

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