CHF vs JPY: Building defences – Rabobank
Jane Foley, Research Analyst at Rabobank, suggests that the comments from the SNB President Jordan at the weekend that “we have still room to go further if necessary” can be seen as a shot across the bows aimed at deterring demand for the CHF.
Key Quotes
“The remarks tie in with comments from BoJ Governor Kuroda made just hours before that “we will continue or even strengthen our monetary easing in the coming months and years to achieve 2 percent inflation”. Both the CHF and the JPY retain a safe haven status and both the SNB and BoJ are likely to be anxious that political uncertainty in the coming months could increase the attraction of their respective currencies.
The determination of both the SNB and the BoJ to persuade investors of the potential of monetary policy comes at a time when scepticism in the marginal benefit of further increases in extraordinary monetary policy in supporting demand and inflation is already at a heightened level. Both Switzerland and Japan appear to be a long way from being able to maintain CPI inflation in the region of 2% y/y and both are already maintaining negative interest rates. That said, the SNB hold one clear trump card over the BoJ insofar as the Swiss make no secret that they are ready to intervene to prevent further strengthening of the CHF.
US Treasury Secretary Lowe has spoken out very pointedly this year against the use of FX intervention to influence exchange rates. Such anti-intervention sentiment, however, appears to be directed most specifically at G7 nations. Over the course of many years, Japan’s Ministry of Finance has signed up to numerous communiques endorsing the setting of FX rates by market forces. While there has been some verbal intervention by Japanese officials this year, the MoF hasn’t ordered any actual FX intervention since 2011 when Japan was hit by tsunami and nuclear disaster. While it may seem unfair that the monetary policy regimes of smaller countries is given a longer leash, the CHF is an overvalued currency on almost all academic measures. By contrast the JPY is not overvalued on all measures despite the sharp rise in the value of the JPY vs. the USD since the start of this year.
Many opinion polls suggest that Clinton won the televised debate against Republican candidate Trump last night. As it stands both the polls and the betting odds clearly favour a Clinton victory in the Presidential election next month. Since Clinton has been a figure in US politics for decades the market is anticipating that there will be little upset to the US’s status quo if she gains power next month. This may change over time, Clinton’s lack of support for the TPP (the Trans-Pacifica trade partnership) is suggestive of a more protectionist approach to trade policy than her predecessor. Even so, a Clinton victory is likely to be greeted with a relief rally in risky assets. On signs that Trump could clinch victory, however, we would expect a rush of political uncertainty to cause a surge in demand for safe haven assets. Both the JPY and the CHF would likely come under buying pressure, though we would expect the risk of more SNB intervention to reinvigorate the downturn in CHF/JPY that dominated the currency pair between mid-2015 and mid-2016.
In terms of the reactions of the USD to a Trump victory, it is possible that safe haven flow could initially be supportive. However, the market is likely to reason that protectionist trade policies in addition to uncertainties about foreign policy are likely to be negative for the economy medium-term. Consequently, on the view that a Trump led government could imply lower for longer interest rates we would expect a softer USD medium-term.”