The CHF/JPY currency pair, which expresses the value of the Swiss franc in terms of the Japanese yen, is perhaps a more obscure pair to monitor in the FX space since few trades this cross directly. If, for example, an institution wished to exchange currencies between CHF and JPY, they would most likely pass through USD in both cases (for example, a Swiss bank could buy USD/CHF, then sell USD/JPY).
As a result of the lack of direct liquidity, the pair is more dependent on the price action of major FX crosses such as USD/CHF and USD/JPY. The price action seen in CHF/JPY, as shown in the chart below, can appear quite noisy or random. The vertical line on the chart below marks the date of my previous article covering CHF/JPY, in which I estimated downside potential in this pair.
Nevertheless, watching the pair is interesting as both the Swiss franc (or CHF) and the Japanese yen (or JPY) are considered safe havens. This is because both countries have traditionally maintained positive current account surpluses, providing both CHF and JPY with a base level of support, and furthermore because both countries (Switzerland and Japan) are independent and politically stable.
I think one of the key characteristics that produce longer-term shifts in the relative values of these currencies depends not on risk sentiment (because two safe-haven currencies would be risk-neutral), but rather the market’s level of confidence (or strength of conviction) in whichever direction is favored by prevailing risk sentiment. The nature of sentiment, so to speak.
The Japanese yen conventionally moves in such a way as to justify being described, in my view, as a ‘reactive’ safe haven. The domestic investment community in Japan includes many retail traders, as well as institutions, and because interest rates have historically been lower in Japan than in other countries such as the U.S., any short-term improvement in risk sentiment has usually led to downside volatility in the yen as capital is exported abroad.
When risk sentiment turns downward, the Japanese yen tends to get bought back, as (often leveraged) positions are unwound. It functions as a safe haven in the sense that it can get bought up during panics, and sold off during boom cycles. However, JPY is quite volatile in this regard. It has often been used as a funding currency, due to low Japanese interest rates, which has meant that international investors outside of Japan have also been able to exploit it. In summary, while it still functions as a safe haven, JPY is more reactive and a conduit through which hot money passes into other markets.
Of course, the situation is a little different now, as rates have been brought to the “zero lower bound” (i.e., to zero, or thereabouts) practically across the board in G10 foreign exchange.
Notice that both Switzerland and Japan have the lowest rates; the lowest rate of all is tied to CHF by virtue of the negative -0.75% rate set by the SNB (since January 2015, after the EUR/CHF peg was broken, which strengthened CHF massively).
Because of Switzerland’s proximity to Europe (indeed, it is in the middle of Europe), it is a natural alternative to EUR. With increasing political instability in the region, which threatens to jeopardize the health and longevity of the European Union (Brexit, Italy, etc.), CHF is a natural hedge against Europe. The Swiss franc has been bid for several reasons, but this is a key reason I think. Europe is also far larger than Switzerland; the E.U. generated a GDP of $19.1 trillion in 2019, whereas Switzerland generated a GDP of $0.7 trillion.
In other words, Switzerland is less than 4% the size of the E.U., so any rises in political instability will likely provide CHF with support. Political instability is a longer-term source of risk, and hence I believe CHF will rise over a longer time horizon than, say, JPY. Since EUR has been in a long-term, bearish trend, and is more liquid than CHF, it is also a more natural funding currency versus CHF (in spite of CHF carrying a lower rate).
In short, I believe that long-term risk-off moves are likely to support CHF versus JPY (all else equal; particularly euro zone-specific risk-off moves), whereas JPY is likely to rise versus CHF during short-term market volatility (particularly in risk assets such as U.S. equities). The relationship is subtle, but I believe it to be evident.
During downside volatility in equities, CHF is pulled down by JPY. It may be the case that both CHF and JPY are strengthening, but JPY tends to strengthen more. The Swiss franc is sometimes able to regain lost ground against the Japanese yen, but usually during “better times” for equities.
CHF/JPY SHORT (Sell)
ENTER AT: 115.350