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Uncertainty tops interest rates

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Economic activity ++ Inflation ++ FX markets ++ Financial markets

Number of the month

SEPTEMBER 2019

FX MONTHLY

QCAM Insight

Swiss economy on shaky ground

Page 3 The macro perspective

Sterling’s history has something to tell us

Page 5 FX market talk

Wellershoff & Partners Ltd. is a strategic research partner of QCAM Currency Asset Management AG. This includes the regular exchange on fundamental developments in the global economy and on financial markets as well as their influence on currency markets. What is more, Wellershoff & Partners Ltd. is available to QCAM Cur-rency Asset Management AG for selected events as well as client meetings.

ImprintContent, concept, and layout:QCAM Currency Asset Management AG, Zug, and Wellershoff & Partners Ltd., Zürich Editorial deadline: September 6, 2019FX Monthly is published monthly in English and German.

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Wellershoff & Partners Ltd.Zürichbergstrasse 388044 ZürichSwitzerland

QCAM Insight Page 1

The macro perspective

FX market talk Page 5

Economic activity Page 7

Inflation Page 11

FX markets Page 15

Financial markets Page 19

Number of the month Page 21

FX Monthly September 2019

Contents

1 | FX Monthly

QCAM Insight

Uncertainty tops interest rates

Uncertainty waxed in August and so did USD, despite

tighter interest rate spreads. If the Fed were to cut

interest rates just as uncertainties subside, we think

USD looks vulnerable.

In last month’s issue of FX Monthly we said that uncer-

tainty would likely remain high this year. In August, in fact,

it increased. The reasons were several: the US-China trade

war escalated, the risk of a hard Brexit increased, Italy’s

government disintegrated, Hong Kong’s demonstrations

turned ugly, tensions ratcheted up in the Strait of Hormuz,

the Amazon’s forests were in flames and Argentina de-

faulted, just to cite some lowlights.

The rising tide of uncertainty shook financial markets.

Equities plunged in early August and have since moved in

a volatile range. The VIX volatility index, the benchmark

of uncertainty, jumped from 13 index points in July to 19

in August. And government bond yields fell sharply—the

yield of 10-year US Treasuries fell by around 50 bps, to

1.5 percent.

On currency markets, USD was the big winner in Au-

gust as the USD index (DXY) gained nearly 1 percent. Over

the month, emerging market currencies lost around 3 per-

cent versus USD. Argentina’s peso plummeted, down

roughly 25 percent. At the same time, USD appreciated

against most major currencies, except JPY, benefitting from

the closing of short-yen carry positions due to the increas-

ing uncertainty. The Swiss National Bank intervened to stop

CHF’s ascent, which otherwise would have risen higher, in

step with rising uncertainty.

Out of sync with interest rates

We think it’s interesting to look at USD’s FX performance

compared to its interest rate spread versus other curren-

cies over the most recent quarter (see chart). In June, the

spread of US interest rates versus other currencies tight-

ened as speculation of a Fed rate cut increased. Unsur-

prisingly, USD weakened against other major currencies,

except AUD, which widened after Australia’s central bank

earlier interest rate cut. That said, even AUD rose versus

USD, pulled upward by the other currencies.

In July, the spread largely stabilized as the Fed cooled

rate-cut expectations. On cue, USD appreciated against all

major currencies. In August, it tightened again, reacting to

renewed speculation about coming rate cuts. It would be

logical, based on June’s experience, that USD would then

depreciate. It did not, as rising uncertainty drove USD high-

er against the majors (excluding JPY, discussed above).

Bernhard Eschweiler, PhD, Senior Economist

QCAM Currency Asset Management AG

FX Monthly | 2

Jitters abate

We will say it again: We see nothing to change our view

that uncertainty is likely to remain elevated for the bal-

ance of this year. On the way, we think August might prove

to be a good example of peak anxiety from the simultane-

ous intensification of several very fraught, not to say, in-

cendiary, politically-driven issues. The trade conflict be-

tween the US and China isn’t over but its burden on the

US economy may compel president Trump to sue for peace.

A hard Brexit remains a significant risk but recent politi-

cal developments have lowered it for now. Meanwhile, It-

aly’s government crisis seems to have passed, for now, and

the Hong Kong government seems to be making serious

efforts to appease demonstrators. Last, not least, diplo-

macy has resumed with Iran. Some good news to calm

market jitters.

What about interest rates?

On the other hand, the prospect of lower interest rates

has by no means vanished. The Fed, the ECB and the BoJ

are all expected to trim rates in September, and most oth-

er major central banks will probably follow suit. The ques-

tion is, who will cut the deepest? The Fed has more lee-

way than most, but will it use it? The pressure to do so is

not overwhelming based on US economic performance

so far this year. But the Fed may feel compelled to provide

some more fuel to the US economy, given the palpable

negative effects of trade conflicts on manufacturing, and

the softness evident in the economies of much of the rest

of the world as well.

It is impossible to predict how today’s many moving

parts will play out. However, we think it is not unreason-

able to see an outcome in which USD loses its edge as 1)

uncertainty eases off its recent peak, and 2) the US inter-

est rate advantage declines further. After all, USD is plain-

ly overvalued on a purchasing power parity basis and

America’s vast twin deficits remain.

EUR

JPYGBP

CHFCAD

AUD

EUR

JPY

GBP

CHF

CAD

AUDEUR

JPY

GBP

CHF

CAD

AUD

−50

5Ex

chan

ge ra

te c

hang

e ve

rsus

USD

, in

% (+

= g

ain)

−20 −10 0 10 20Change in 3−months swap rates versus USD, in basis points (+ = tighter)

June

July

August

Interest and exchange rates changes versus USD

Source: Bank of Japan, QCAM Currency Asset Management

3 | FX Monthly

The slowdown in the global economy has not halted at

Switzerland’s borders. Swiss companies are lately

showing particular caution when investing. The health

sector continues to boom. On the one hand, this ben-

efits the sector’s value creation in Switzerland, and on

the other, the pharmaceutical sector, whose exports

continue their strong momentum.

Some political conflicts that have been threatening to de-

rail the global economy have eased a bit in recent weeks.

But this does not blunt the fact that the list of potentially

destabilizing risks is still very long. Many current political

dramas are characterized by an almost daily back and

forth, with the media and markets straining to keep up.

This applies to the trade conflict between China and the

US, the ongoing turmoil around Brexit, and also the dem-

onstrations in Hong Kong. After few signs of tensions

slackening there, the local government now seems to be

responding to some of the demonstrators’ demands. But

the conflict still appears to be far from finding resolution.

Uncertainties about the economic outlook stemming

from political risks are increasingly visible in the senti-

ment data of industrial companies in the US. In the Euro-

zone, corporate sentiment also declined sharply last year.

Although there was some stabilization in August, it took

place at a low level. Surprisingly, other sectors of the econ-

omy have been unimpressed by industry’s slump – but this

seems to be changing now too. Both in the US and in the

Eurozone, consumer sentiment declined in August, al-

though remaining at high levels in both regions.

Switzerland can’t escape the gloom

Globally, economic growth since the beginning of the year

has been below the long-term trend, and Switzerland is

not immune to the prevailing weakness. According to a

preliminary estimate, growth in the second quarter of

2019 compared to the first was a mere 0.3 percent. Equip-

ment investment was very weak, at -1.0 percent, reflect-

ing the uncertainty companies feel about future econom-

ic developments. After a strong start to the year thanks

to mild winter, the value added in the construction sector

grew only weakly lately. Consumption growth also re-

mained below average and thus, given the growing popu-

lation, still modest.

The Swiss economy’s projected annual growth rate of

0.3% is very low. This is also due to a special factor that

distorts Swiss GDP estimates: sports economics. Many

important international sports organizations have their

headquarters in Switzerland, and major events such as the

FIFA World Cup and the Olympic Games have a clearly

visible effect on Swiss GDP. As a result, growth was over-

estimated in the first half of 2018, while in the second half

growth was particularly poor due to a lack of big global

sporting events. As a result, the State Secretariat for Eco-

nomic Affairs no longer only publishes seasonally adjust-

ed data, but also data with a «sports event adjustment.»

Excluding these events from GDP calculations, growth was

0.9 percent compared to the same quarter last year.

Individual sectors support growth

With or without big sports events, the Swiss economy is

only growing slowly. That Switzerland has not yet slipped

Swiss economy on shaky grounds

The macro perspective

FX Monthly | 4

Swiss economy on shaky grounds into recession is due to the high demand from health sec-

tor. This can be seen in the domestic economy, where val-

ue creation in the health sector continues to grow dynam-

ically. On the other hand, Swiss industry is also well

prepared for this megatrend. At just over 5 percent of the

total wealth creation of the Swiss economy, the pharma-

ceutical industry is now by far the largest industrial sec-

tor. Pharmaceutical exports remained strong, and these

exports are not only less cyclical in nature but also less

dependent on exchange rate movements. The recent ap-

preciation of the franc should therefore have little impact

on the development of this sector.

SNB faces difficult decisions

As there are currently only a few sectors in Switzerland

with positive growth momentum, the Swiss National Bank

faces some difficult decisions. With no alternatives avail-

able, support for the sluggish economy primarily comes

in the form of currency interventions. But are these in-

terventions really useful if the export sector is relatively

robust thanks to the strong pharmaceutical industry? The

interventions this summer suggest that the SNB still be-

lieves in the benefits of currency market interventions, at

least for the time being.

−4

−2

0

2

4

6

Annu

al g

row

th ra

tes,

in %

1995 2000 2005 2010 2015

Real GDPW&P ESI (fitted)W&P trend growth

Weak growth in Switzerland

Source: Thomson Reuters Datastream, Wellershoff & Partners

5 | FX Monthly

The British pound continues to be buffeted by power-

ful political and economic forces that have pushed the

currency far into undervalued territory. But, we note,

there have been times, not even so very long ago,

when Sterling was cheaper still – and even more vol-

atile. In 1985 the pound touched its 288-year low of

1.04 against the US dollar, only to bounce back sharp-

ly later that year. So, we’ve seen this movie before.

The story has always been that Sterling eventually re-

turns to fair value. But when?

The political backdrop to Sterling’s decline in 1985 was

messy, and there are some notable similarities to today’s

uncertain environment. In the US in ‘85 there was talk of

tariffs to protect domestic manufacturing. And the larger

political world looked rather shaky, too. Two superpow-

ers were engaged in a frightening arms race and terrorist

incidents in Europe and Asia set the world’s nerves on

edge. Then as now, the US dollar was plainly expensive

against a range of currencies.

Starting at the beginning

In 1791, when trading began between Great Britain and

its united former colonies in America, the price of one

pound Sterling was USD 4.55. From that level, Sterling

has steadily become cheaper against the dollar, on aver-

age by just over one US cent per year. The three-century

trend, therefore, has clearly been downward. But there

have also been periods of unexpected reversals. In 1864,

as the American Civil War raged, it looked like the United

States would break apart. In that year, Americans were

prepared to pay USD 9.97 to buy one pound Sterling. By

the start of the Second World War, in 1939, the pound

was trading at the same level as it had in 1791. In other

words, the bulk of Sterling’s weakness against the US dol-

lar is a post-World War Two phenomenon. Despite that

costly war, Churchill captured Britain’s world view in a

speech in Zurich in 1946 where he called for «building a

kind of United States of Europe.» But, for the record, he

did not see the UK as part of this project. Britain was dif-

ferent. After all, it still had its Empire.

Fast-forward to 2019

Britain wants out of the European project. Free trade

agreements with its former colonies, including Canada,

the United States, India and Australia, have a powerful ap-

peal. But the negotiations will not be quick or easy.

What this all means for Sterling’s outlook depends on

how the many moving parts of this story fit or fail to fit to-

gether under several different assumptions. But one ma-

jor assumption has to be that the UK is likely to continue

to have higher average inflation than the US, the Euro-

zone, Switzerland or Japan. This would speak for Sterling’s

purchasing power parity differential to gradually weaken

against the currencies of those economies.

The current Sterling discount

Sterling is cheap today. While we cannot predict its near-

term path, we do know that too wide a gap between a cur-

rency’s spot price and its purchasing power parity is un-

sustainable, as shown in the chart. This is because too

large a gap creates all kinds of arbitrage opportunities. At

Sterling’s history has something to tell us

FX market talk

FX Monthly | 6

the same time, we know that large deviations from pur-

chasing power parity can persist for extended periods of

time, as the chart also shows.

The current phase of Sterling weakness reflects uncer-

tainties on a wide range of issues that are impossible to ac-

curately price at this point. Previously unthinkable notions,

such as the possibility of the dissolution of the United King-

dom, now sound a bit less preposterous. Scotland and Eng-

land have been joined a union since 1707 – long before the

United States was founded. But Brexit is fundamentally

challenging that historical relationship.

Scenarios where Scotland could choose independence

and join the EU on its own or that Northern Ireland might

opt to unite with Ireland simply are not standard inputs for

FX models. If those break-ups were similar to the “velvet

revolution,” when Czechoslovakia chose to dissolve peace-

fully into the Czech Republic and Slovakia, then Sterling

might be well served. But there is also a plausible scenario

where the break-up proves to be very costly to England.

For example, if Scotland were to reject paying its full share

of the UK government’s debt and contingent liabilities, the

UK’s debt burden would be staggering.

At the other end of the spectrum, we still cannot exclude

the scenario of the British people ultimately deciding not

to leave the EU. That development would clearly be posi-

tive for Sterling.

The current opposition favors policies that aim to dis-

tribute wealth to a far greater extent than the UK has wit-

nessed in recent decades. This possibility alone enhances

the appeal of diversifying out of Sterling and for some or-

ganizations even to end all operations in the UK. No longer

in the EU and no longer subject to its Maastricht Treaty

limits on government debt, a future UK government would

be able to decide its own borrowing limits.

To conclude, Sterling is clearly cheap today relative to

its purchasing power parity but the scenarios for the fu-

ture of the UK could hardly be more extreme. History re-

minds us that even at today’s cheap levels, in a adverse

scenario Sterling could become cheaper still, as we saw

in 1985.

1.00

1.50

2.00

2.50

1985 1990 1995 2000 2005 2010 2015 2020

GBPUSDGBPUSD PPPNeutral Territory

The Sterling discount has been larger before


US fell below the 50-point threshold, pointing to a de-

cline in industrial production. Despite this alarming

prospect, our outlook for the US has not fundamental-

ly changed. Historically, ISM Manufacturing surveys

have proven unreliable harbingers of recessions, and in

August the indicator for service sectors was surprising-

ly positive. So, while we expect a slowdown in growth

in the US, we do not foresee an imminent recession.

Compared to the first quarter, the Eurozone grew by

only 0.2 percent in the second quarter of this year, half

the growth rate it achieved in the first quarter. Germa-

ny was the Eurozone’s laggard, delivering slightly nega-

tive growth. This was mainly due to weakness in exports,

which fell by 8 percent in the second quarter. Sentiment

indicators had long anticipated this slump in manufac-

turing. But after falling steeply for more than a year in

both Germany and in the Eurozone as a whole, senti-

ment stabilized in August, albeit at a low level.

For the first time since 2016, the closely watched

ISM Manufacturing Index for industrial sentiment in the

Economic activity

Trend growth1

Real GDP growth2 W&P economic sentiment indicators3

Q3/2018 Q4/2018 Q1/2019 Q2/2019 5/2019 6/2019 7/2019 8/2019

United States 1.7 3.1 2.5 2.7 2.3 2.8 2.5 2.4 2.3

Eurozone 1.0 1.7 1.2 1.2 1.1 2.1 1.8 1.8 1.8

Germany 1.4 1.1 0.6 0.9 0.4 2.2 1.8 1.4 1.4

France 0.7 1.5 1.2 1.3 1.4 1.9 1.8 1.8 1.8

Italy 0.2 0.5 0.0 -0.1 -0.1 0.7 0.5 0.7 0.6

Spain 1.6 2.5 2.3 2.4 2.3 2.5 2.4 2.5 2.7

United Kingdom 1.8 1.6 1.4 1.8 1.2 1.1 1.1 1.0 0.8

Switzerland 1.5 2.5 1.4 1.0 0.3 1.8 1.6 1.2 1.4

Japan 0.4 0.2 0.3 1.0 1.1 1.8 1.7 1.6 1.6

Canada 1.6 2.0 1.6 1.4 1.6 1.1 1.6 1.6 1.8

Australia 2.4 2.6 2.2 1.7 1.4 2.7 2.7 2.6 2.6

Brazil 1.4 1.3 1.1 0.5 1.0 1.0 1.1 1.6 –

Russia 0.1 2.2 2.7 0.5 0.9 0.0 -1.1 -0.5 -0.6

India 7.7 7.0 6.6 5.8 5.0 6.7 6.6 6.6 6.5

China 7.4 6.5 6.4 6.4 6.2 6.3 5.9 6.1 6.4

Advanced economies4 1.4 2.3 1.8 1.9 1.8 2.4 2.2 2.1 2.0

Emerging economies4 6.0 5.3 4.9 4.5 4.4 4.6 4.3 4.5 4.5

World economy4 3.5 3.8 3.4 3.3 3.2 3.5 3.2 3.3 3.2

1 Current year-on-year trend growth rate of real GDP, in percent, according to the proprietary trend growth model of Wellershoff & Partners.2 Year-on-year growth rate, in percent.3 Wellershoff & Partners economic sentiment indicators are based on consumer and business surveys and have up to 6 months lead

on the year-on-year growth rate of real GDP.4 Calculations are based on nominal GDP weights derived from purchasing power parity exchange rates.

Source: European Commission, Penn World Table, Thomson Reuters Datastream, Wellershoff & Partners

Growth overview

7 | FX Monthly


−15

−10

−5

0

5

10

15

20

chan

ge y

oy in

per

cent

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Brazil Russia India China

Economic growth in emerging economies

−10

−8

−6

−4

−2

0

2

4

6

8

chan

ge y

oy in

per

cent

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

USA Eurozone UK Switzerland Japan

Economic growth in advanced economies

FX Monthly | 8

Global GDP share1 Current account2 Public debt2 Budget deficit2 Unemployment rate3

Ø 5 years Current Ø 5 years Current Ø 5 years Current Ø 5 years Current Ø 5 years Current

United States 24.0 24.5 -2.3 -2.4 105.7 110.3 -5.3 -6.6 4.9 3.7

Eurozone 16.1 15.6 3.8 – 109.2 – -1.8 – 10.0 7.5

Germany 4.7 4.5 7.9 7.3 76.2 66.5 1.0 0.9 6.0 5.0

France 3.3 3.2 -0.6 0.0 121.8 124.1 -3.3 -3.2 9.5 8.2

Italy 2.5 2.3 2.3 2.6 155.5 151.0 -2.5 -2.4 11.6 9.9

Spain 1.7 1.6 1.5 0.8 115.9 113.0 -4.3 -2.0 19.7 13.9

United Kingdom 3.6 3.2 -4.5 -5.6 113.7 112.4 -3.2 -2.1 4.7 3.2

Switzerland 0.9 0.8 9.2 9.6 42.7 40.3 0.7 1.4 3.1 2.1

Japan 6.1 5.9 3.1 3.0 220.8 225.6 -3.6 -2.5 3.1 2.2

Canada 2.1 2.0 -2.9 -3.1 89.9 88.0 -0.2 -0.6 6.6 5.7

Australia 1.7 1.6 -3.1 -2.1 38.7 41.1 -2.2 -1.5 5.7 5.2

China 14.8 16.3 1.7 0.4 44.5 55.4 -3.2 -6.1 4.0 –

Brazil 2.5 2.2 -1.9 -1.7 77.0 90.4 -7.9 -7.3 10.3 11.8

India 3.0 3.4 -1.5 -2.5 69.3 69.0 -7.0 -6.9 – –

Russia 2.0 1.8 3.8 5.7 15.6 13.8 -1.4 1.0 5.3 4.4


−15

−10

−5

0

5

in p

erce

nt o

f GD

P

2002 2004 2006 2008 2010 2012 2014 2016 2018


Budget deficits in advanced economies

Economic indicators

1 In percent; calculations based on market exchange rates. 2 In percent of nominal GDP. 3 In percent.

Overview

9 | FX Monthly


0

20

40

60

80

100

in p

erce

nt o

f GD

P

2002 2004 2006 2008 2010 2012 2014 2016 2018


Public debt in emerging economies

0

50

100

150

200

250

in p

erce

nt o

f GD

P

2002 2004 2006 2008 2010 2012 2014 2016 2018


Public debt in advanced economies

FX Monthly | 10

not managed to change inflation expectations. The BoJ

in any case is still very far from reaching its two-percent

inflation target.

Argentina is struggling with the opposite problem—

too high a rate of inflation. The victory of the opposition

left-wing candidate in the primaries alarmed currency

markets and sent the peso tumbling. Already in 2018, in-

flation increased in Argentina by almost 50 percent. For

this year, the government has estimated inflation increas-

ing by a rate of about 23 percent. However, faced with

rising import prices as the peso tumbles, we expect a

higher inflation rate than the government’s forecast.

The Bank of Japan continues to make slow progress in its

struggle to boost the country’s low inflation rate. After

adjusting for particularly volatile goods, core inflation in

Japan stood at zero percent in 2017. Thanks to the BoJ’s

sustained efforts, it has steadily risen since then, climb-

ing to 0.6 percent most recently. However, this remains

a modest advance in the context of a well-utilized labor

market. As ever, the inflation expectations of economic

actors – companies and consumers – play an important

role in the development of inflation. Today, low inflation

expectations are deeply anchored in Japan. And so far,

the many measures undertaken by the central bank have

Inflation

Ø 10 years1 Inflation2 Core inflation3

2/2019 3/2019 4/2019 5/2019 2/2019 3/2019 4/2019 5/2019

United States 1.7 1.8 1.6 1.8 – 2.0 2.1 2.2 –

Eurozone 1.3 1.2 1.3 1.0 1.0 0.8 1.1 0.9 0.9

Germany 1.3 1.4 1.6 1.7 1.4 1.4 1.4 1.5 –

France 1.1 0.9 1.2 1.1 1.0 0.5 0.9 0.9 –

Italy 1.2 0.8 0.7 0.4 0.5 0.4 0.4 0.5 0.6

Spain 1.2 0.8 0.4 0.5 0.3 0.7 0.9 0.9 –

United Kingdom 2.2 2.0 2.0 2.1 – 1.7 1.8 1.9 –

Switzerland 0.0 0.6 0.6 0.3 0.3 0.6 0.7 0.4 0.4

Japan 0.4 0.8 0.7 0.6 – 0.5 0.6 0.6 –

Canada 1.7 2.4 2.0 2.0 – 2.0 2.0 2.0 –

Australia 2.1 1.5 1.6 – – 1.4 1.5 – –

Brazil 5.9 4.7 3.4 3.2 3.4 3.9 3.6 3.3 –

Russia 7.1 5.1 4.7 4.6 4.3 4.7 4.6 4.5 4.3

India 6.9 3.0 3.2 3.2 – – – – –

China 2.5 2.7 2.7 2.8 1.5 1.6 1.6 1.6 –

Advanced economies4 1.5 1.5 1.4 – – 1.4 1.6 – –

Emerging economies4 4.3 3.2 3.1 3.1 3.1 2.2 2.2 2.1 2.1

World economy4 2.8 2.4 2.3 – – 1.6 1.6 – –

1 Average annual consumer price inflation, in percent.2 Year-on-year change of the consumer price index (CPI), in percent.3 Core inflation is a measure of inflation that excludes certain items that can experience volatile price movements, such as energy and

certain food items; year-on-year change of the core consumer price index, in percent.4 Calculations are based on nominal GDP weights derived from purchasing power parity exchange rates.


Inflation overview

11 | FX Monthly


−10

−5

0

5

10

15

20

in p

erce

nt

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020


Consumer price inflation in emerging economies

−4

−2

0

2

4

6

in p

erce

nt

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020


Consumer price inflation in advanced economies

FX Monthly | 12


−6

−4

−2

0

2

4

in p

erce

ntag

e po

ints

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

EURUSD USDJPY GBPUSD EURCHF USDCHF

Interest rate differentials

Interest rates

Current exchange

rate

Interest rate differentials 3 months1 Interest rate differentials 12 months1

Current 1 year ago Ø 5 years Ø 10 years Current 1 year ago Ø 5 years Ø 10 years

EURUSD 1.105 2.70 1.53 0.63 2.37 3.09 1.80 0.77 0.71

USDJPY 106.8 -2.37 -1.28 -0.71 -1.92 -2.71 -1.58 -0.94 -0.91

GBPUSD 1.231 1.53 0.70 0.17 1.07 1.81 0.80 0.17 0.14

EURCHF 1.090 -0.36 -0.45 -0.47 -0.33 -0.28 -0.42 -0.57 -0.58

USDCHF 0.986 -3.06 -1.98 -1.10 -2.70 -3.36 -2.23 -1.34 -1.29

GBPCHF 1.215 -1.53 -1.27 -0.93 -1.62 -1.55 -1.42 -1.17 -1.15

CHFJPY 108.2 0.69 0.69 0.39 0.78 0.66 0.65 0.39 0.38

AUDUSD 0.686 0.83 -0.38 -1.83 1.29 1.33 0.12 -1.31 -1.40

USDCAD 1.318 -0.35 0.05 0.44 0.12 -0.49 -0.16 0.25 0.24

USDSEK 9.618 -2.73 -1.63 -0.30 -1.90 -2.99 -1.80 -0.45 -0.40

USDRUB 65.7 3.92 8.43 7.37 5.10 4.60 7.91 7.05 7.18

USDBRL 4.063 13.54 12.61 9.83 3.28 4.91 8.50 8.90 9.05

USDCNY 7.124 0.52 2.32 3.05 1.10 0.65 2.08 2.70 2.69

USDTRY 5.722 21.31 13.39 10.70 13.95 23.66 13.33 10.75 10.52

USDINR 71.71 7.47 8.11 8.14 3.73 4.66 5.68 6.16 6.06

1 The gap in interest rates between the second currency and the first one, in percentage points; e.g. US dollar minus euro for EURUSD.

Interest rate differentials overview

13 | FX Monthly


−2

0

2

4

6

in p

erce

nt

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020


10-year government bond yields

−2

0

2

4

6

8

in p

erce

nt

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020


3-month Libor

FX Monthly | 14

FX markets

Current exchange

rate

Performance1 Purchasing Power Parity2

YTD 3 months 1 year 5 years PPP Neutral territory Deviation3

EURUSD 1.105 -3.4 -2.6 -5.0 -14.7 1.28 1.11 - 1.45 -13.6

USDJPY 106.8 -2.7 -1.2 -3.7 1.8 86.3 71.1 - 101.6 23.7

GBPUSD 1.231 -3.3 -3.5 -4.9 -24.5 1.57 1.4 - 1.8 -21.8

EURCHF 1.090 -3.3 -2.6 -3.2 -9.6 1.19 1.1 - 1.27 -8.0

USDCHF 0.986 0.1 -0.1 1.9 6.0 0.93 0.81 - 1.04 6.4

GBPCHF 1.215 -3.2 -3.5 -3.1 -20.0 1.46 1.26 - 1.66 -16.8

CHFJPY 108.2 -2.7 -1.1 -5.5 -4.0 93.1 78.8 - 107.4 16.2

AUDUSD 0.686 -2.6 -2.2 -4.9 -26.9 0.70 0.59 - 0.85 -2.1

USDCAD 1.318 -3.5 -0.8 -0.1 21.1 1.20 1.1 - 1.3 10.1

USDSEK 9.618 8.5 2.5 5.7 35.6 7.65 6.59 - 8.71 25.8

USDRUB 65.7 -5.2 1.4 -5.0 77.5 46.7 37 - 56.3 40.9

USDBRL 4.063 4.8 5.4 -2.3 80.7 3.07 2.51 - 3.64 32.3

USDCNY 7.124 3.8 3.0 4.3 16.0 6.28 6.04 - 6.51 13.5

USDTRY 5.722 7.6 -1.2 -13.3 165.0 4.20 3.79 - 4.62 36.1

USDINR 71.71 2.7 3.2 -0.3 18.7 68.7 64.4 - 72.9 4.4

1 Performance over the respective period of time, in percent.2 Purchasing power parity (PPP) is estimated based on the relative development of inflation rates in two currency markets;

the neutral territory is determined by ± 1 standard deviation of the historical variation around the PPP value.3 Deviation of the current spot rate from PPP, in percent.


and in the UK the likelihood of a hard Brexit has reced-

ed. In turn, all major currencies have appreciated against

the Swiss franc since mid-August. The biggest gainer

was the British pound, which had been undercut by the

worrying political developments in prior weeks.

Despite the slackening of tensions in some arenas

lately, we caution that political risks remain high, and

not only from Brexit. It would be mistaken to think that

political winds could not reverse again and with equal

speed.

Currency markets are at the mercy of political develop-

ments these days. The remarkable accumulation of po-

litical risk this year drove investors into the safe-haven

comfort of the Swiss franc. At least this was the case

until the beginning of August. In an effort to dampen

the franc’s recent appreciation, the Swiss National Bank,

after a two-year hiatus, resumed its foreign currency

purchases.

Most recently, however, the winds have shifted on

various political fronts and they are now blowing against

the currency markets. The US and China have an-

nounced high-level trade talks, Hong Kong’s prime min-

ister has withdrawn the controversial extradition bill,

FX overview

15 | FX Monthly


1020304050607080

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

USDRUB

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

USDBRL

5.506.006.507.007.508.008.509.00

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

USDCNY

35404550556065707580

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

USDINR

1.00

1.20

1.40

1.60

1.80

2.00

2.20

1985 1990 1995 2000 2005 2010 2015 2020

GBPUSD

0.20

0.40

0.60

0.80

1.00

1.20

1985 1990 1995 2000 2005 2010 2015 2020

AUDUSD

1.00

1.20

1.40

1.60

1.80

2.00

2.20

1985 1990 1995 2000 2005 2010 2015 2020

EURCHF

0.50

1.00

1.50

2.00

2.50

3.00

1985 1990 1995 2000 2005 2010 2015 2020

USDCHF

0.60

0.80

1.00

1.20

1.40

1.60

1985 1990 1995 2000 2005 2010 2015 2020

SpotPPPNeutral territory

EURUSD

50

100

150

200

250

300

1985 1990 1995 2000 2005 2010 2015 2020

USDJPY

FX Monthly | 16

FX volatility

Source: Thomson Reuters Datastream, QCAM Currency Asset Management, Wellershoff & Partners

0

5

10

15

20

25

30

1−m

onth

his

toric

al v

olat

ility

in p

erce

nt

2005 2010 2015 2020

QCAM volatility indicator3

Current exchange

rate

Volatility 3 months1 Volatility 12 months1

Historical Implied Ø 5 years2 Ø 10 years2 Historical Implied Ø 5 years2 Ø 10 years2

EURUSD 1.105 5.0 5.5 8.4 9.4 5.9 6.1 8.5 9.9

USDJPY 106.8 6.9 6.6 9.0 9.7 6.3 7.0 9.4 10.6

GBPUSD 1.231 7.1 11.6 9.3 9.2 8.2 10.1 9.5 9.8

EURCHF 1.090 4.7 5.3 6.1 6.2 4.6 5.3 6.7 6.9

USDCHF 0.986 6.2 6.1 8.3 9.4 5.9 6.6 8.7 10.0

GBPCHF 1.215 7.9 11.2 9.3 9.4 8.0 9.9 9.6 10.0

CHFJPY 108.2 5.6 5.6 8.9 10.4 6.2 6.2 9.5 11.2

AUDUSD 0.686 7.0 7.1 9.7 10.8 7.9 7.9 10.3 11.6

USDCAD 1.318 5.1 5.3 7.9 8.5 5.8 5.8 8.2 9.0

USDSEK 9.618 7.0 7.6 9.7 11.1 8.2 8.3 10.0 11.7

USDRUB 65.7 9.2 10.0 17.0 14.1 9.6 11.4 17.2 14.9

USDBRL 4.063 12.8 13.2 15.9 14.6 14.1 13.3 15.9 15.4

USDCNY 7.124 4.4 5.3 4.7 3.5 3.8 5.6 5.5 4.4

USDTRY 5.722 23.1 16.5 15.2 13.3 20.7 18.6 16.2 14.6

USDINR 71.71 5.7 6.5 6.6 8.5 6.5 6.6 7.7 9.5

3 The QCAM volatility indicator measures general volatility in global FX markets; the indicator is based on historical volatility

of the main exchange rates, which are weighted by trading volume.

1 Annualized volatility, in percent. 2 Average of implied volatility.

FX volatility overview

17 | FX Monthly


0

10

20

30

40

50

60

3−m

onth

impl

icit

vola

tility

in p

erce

nt

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

USDRUB USDBRL USDCNY USDTRY USDINR

Implicit volatility

0

5

10

15

20

25

30

3−m

onth

impl

icit

vola

tility

in p

erce

nt

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

EURUSD USDJPY GBPUSD EURCHF USDCHF

Implicit volatility

FX Monthly | 18


0

50

100

150

200

250

300

inde

x (J

anua

ry 2

002

= 10

0)

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Money market Government bonds Stocks Real estate

Performance of selected Swiss asset classes

Financial markets

Performance in either local curreny or USD1 Performance in CHF1

YTD 3 months 1 year 5 years YTD 3 months 1 year 5 years

Swiss money market -0.3 -0.1 -0.7 -2.8 -0.3 -0.1 -0.7 -2.8

Swiss government bonds 4.5 3.0 6.4 15.3 4.5 3.0 6.4 15.3

Swiss corporate bonds 3.5 1.6 4.1 10.6 3.5 1.6 4.1 10.6

Swiss equities (SMI) 22.0 5.8 17.5 38.7 22.0 5.8 17.5 38.7

European equities (Stoxx600) 18.1 2.1 4.5 36.5 16.7 0.8 -0.1 25.1

UK equities (Ftse100) 14.9 2.7 2.4 37.7 13.3 -3.0 -3.4 11.7

Japanese equities (Topix) 6.8 -1.8 -5.8 39.0 8.6 -0.8 -3.8 44.1

US equities (S&P 500) 20.1 3.7 9.2 68.1 19.2 4.6 8.9 51.0

Emerging markets equities 9.8 -3.7 -0.2 12.6 8.9 -2.8 -0.5 1.1

Global equities (MSCI World) 18.3 2.9 5.6 43.3 17.3 3.8 5.3 28.8

Swiss real estate 14.7 2.5 12.7 39.1 14.7 2.5 12.7 39.1

Global real estate 18.1 3.2 11.1 35.5 17.2 4.1 10.7 21.7

Commodities 3.2 -4.7 -8.1 -39.7 2.3 -3.9 -8.4 -45.8

Brent oil 20.7 -10.3 -17.9 -40.4 19.8 -9.5 -18.1 -46.5

Gold 9.0 6.8 10.7 4.4 8.2 7.8 10.4 -6.2

1 Performance over the respective period of time, in percent.

Performance overview

19 | FX Monthly


0

500

1000

1500

2000

USD

per

troy

oun

ce

0

20

40

60

80

100

120

140

160

USD

per

bar

rel (

Bren

t)

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Oil price (lhs) Gold (rhs)

Performance of selected commodity prices

0

50

100

150

200

250

300

350

400

inde

x (J

anua

ry 2

002

= 10

0)

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020


Performance of selected equity markets (in local currency)

FX Monthly | 20

Legal Disclaimer

This report has been prepared and published by QCAM Currency Asset

Management AG and Wellershoff & Partners Ltd. The analysis contained herein is

based on numerous assumptions. Different assumptions could result in materially

different results. Although all information and opinions expressed in this document

were obtained from sources believed to be reliable and in good faith, no represen-

tation or warranty, express or implied, is made as to its accuracy or completeness.

All information and opinions indicated are subject to change without notice. This

document may not be reproduced or circulated without the prior authorization of

QCAM Currency Asset Management AG or Wellershoff & Partners Ltd. Neither

QCAM Currency Asset Management AG nor Wellershoff & Partners Ltd. will be li-

able for any claims or lawsuits from any third parties arising from the use or distri-

bution of this document. This report is for distribution only under such circumstanc-

es as may be permitted by applicable law.

Number of the monthThe US Federal Reserve cut rates by 25 basis points at

the end of July. The move was justified to counter the

danger of an economic slowdown. Or did the Fed cave

in to pressure from President Trump, who has been call-

ing for lower interest rates? In any case, he was not sat-

isfied with the Fed’s decision. In Trump’s view, the Fed

missed a chance to cut rates by at least 100 basis points.

The next opportunity comes on18 September. The Fed

could refrain from making a cut, not least to demon-

strate its independence. But that does not look likely.

25 basis points

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