Surprise, surprise 2!

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The macro point

The Bank of Japan has finally normalized its monetary policy, but the gradual approach has not pleased the market. The yen has plummeted to its lowest point since 2008 against the euro. The Swiss National Bank surprised the market by lowering its key interest rate much earlier than expected. As a result, the Swiss franc has weakened. For other central banks, it seems that they will mostly begin their rate-cutting cycle next June. There were many central bank meetings last week (Reserve Bank of Australia, Swiss National Bank, Bank of England, US Federal Reserve, Bank of Japan). But there were few surprises. All central banks, except for the Bank of Japan (BoJ) and the Swiss National Bank (SNB), kept their monetary policy unchanged. As expected, the BoJ has finally emerged from the era of negative rates. However, the extent of the increase is limited (10 basis points), which explains why the yen has not strengthened in the process. Worse, it has plummeted and even hit a low point since 2008 against the euro. The BoJ hinted at no further rate hikes this year. It’s not with a key rate between 0% and 0.10% that the yen will sustainably return to an upward trend. We believe that the weak yen is here to stay. This is not a problem for Japan since it will help stimulate exports, which are essential for the country's economy. In the past, Japan made two main mistakes when it thought it had emerged from deflation. It normalized its monetary policy too quickly. That is not the case now. Moreover, it let the yen increase too fast, thus harming economic dynamics. One can bet that it will be very cautious about this point this time. The surprise came from Switzerland. There were rumors about a possible rate cut by the SNB as early as March. Few market participants thought it was credible. In the end, the central bank did it. The Swiss key rate was lowered by 25 basis points to 1.50%. Another rate cut of similar magnitude is highly likely next June. For other central banks, the status quo has prevailed. In the UK, the surprise drop in inflation in February, from 4% to 3.4%, did not move the Bank of England. The market is still divided over the start of the rate-cutting cycle. Only 56% of money market participants anticipate a first cut next June. Nothing is set in stone. However, they are convinced that it is in June that the ECB (84% probability) and the Bank of Canada (80%) will lower their interest rates. Except for the Reserve Bank of Australia, which is hesitating between lowering or raising rates, as evidenced by its latest statement, it seems that there is a form of convergence among the main central banks on the opportunity to act simultaneously. This easing cycle will be different from previous ones. It occurs when most of these economies are not in recession (apart from the UK, but it's a technical recession). Some are showing impressive economic resilience, like the United States. The extent of rate cuts will be limited. Central banks have no reason to rush with 50 basis point cuts – 25 basis points will suffice. In the US, even with high rates, financial conditions are still very accommodative. Finally, inflation remains a problem to be considered, requiring caution on this front. In the case of synchronized monetary policies, as the market seems to anticipate, expect volatility to remain rather subdued in major currency pairs. We have returned to levels not seen since 2019 for some currencies. In this context, the interest rate differential will certainly not be a major factor in exchange rate developments. However, we believe that the economic growth differential is a factor to consider. This particularly explains the relative weakness of the euro, in our view. Even if the eurozone should avoid recession this year, its growth will be close to zero. This reduces incoming capital flows (lower economic attractiveness) and accentuates outgoing flows that, unsurprisingly, are almost certain to find a higher return across the Atlantic. This phenomenon is structural.

Technical point

In the foreign exchange market, besides the collapse of the yen we already mentioned, the other significant fact is the appreciation of the EUR/CHF pair following the SNB's surprise decision. The appreciation movement was already underway for several weeks as the Swiss central bank has been intervening since at least January in the FX market to weaken the CHF. In the medium term, a return to parity is now not excluded. Nothing to report on the EUR/GBP side, which is the most stable major pair. The playing field is very narrow, with a large range between 0.85 and 0.87 that has remained for several months. The supports and resistances listed below respectively indicate the low and high points within which the rates should move during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0699	1.0880	1.1001	1.1069
EUR/GBP	0.8380	0.8411	0.8660	0.8711
EUR/CHF	0.9454	0.9455	0.9839	0.9930
EUR/CAD	1.4411	1.4591	1.4813	1.4901
EUR/JPY	158.98	159.00	166.12	167.00

Announcements to follow

It is a quiet week ahead, with no major movements on the statistics front. The US government will release the latest GDP estimate for Q4 2023 – likely in line with the first estimate of 3.2%. We expect a slowdown in growth in 2024 with a 2% growth this quarter. But it remains quite respectable, especially compared to Europe. Several factors explain the good health of the US economy:

A high public deficit.
For the first time in forty years, the United States has achieved the goal of energy independence and produces more oil than any other country in history.
The economy is less sensitive to high rates. This is particularly explained by the fact that 96% of long-term mortgages are at fixed rates, whereas they are commonly believed to be at flexible rates.
The Covid savings surplus has been consumed but the states aid continues to support US household consumption.

All of this is good news for the US dollar, which continues to show impressive strength against its main counterparts. Below you will find the publications and events expected to have a major impact on the evolution of currency rates.

Day	Time	Country	Indicator	What to expect?
03/26/2024	15:00	USA	Conference Board Consumer Confidence (March)	Previous at 106.7.
03/28/2024	09:55	GER	Unemployment numbers (March)	The labor market faces the recession by reducing working hours rather than layoffs.
03/29/2024	13:30	USA	Core PCE Index (February)	Previous at 2.8% year-on-year.