JPY and CHF: No need for safe haven? - Rabobank

The JPY and the CHF have been the worst performing G10 currencies over the past 24 hrs or so as the JPY has dropped around 0.5% vs. the USD, the CHF by a more modest 0.14%, notes Jane Foley, Senior FX Strategist at Rabobank. 

Key Quotes

“The reason why these safe haven currencies are on the back foot is the perception that geopolitical risk has dropped as a result of the news that US President Trump and N. Korea leader Kim Jong Un will meet this spring.”

“Last year’s news flow was punctuation by reports indicating a deterioration in the relationship between N. Korea and the US. Arguably there was a build-up of tension as the year progressed, though interestingly the JPY’s reactions were not necessary in step with the seriousness of the news.   Although there was a clear drop in the value of USD/JPY in Jan through into early Feb and again from mid-March through to mid-April, as the year progressed investors’ demand for safe haven currencies was dampened by strong economic growth.  Through most of last year risk appetite was at buoyant level due to strength in economic fundamentals.  For many investors, the attraction of high yield was difficult to reconcile with geopolitical worries.”

“This year there has been a clear trend towards JPY strength suggesting a clear increase in demand for a safe haven. The CHF has not kept pace with its Japanese counterpart and we would attribute in part to the fact that the SNB maintains as a policy tool a threat to intervene. We would also suggest that the relatively buoyant stance of the EUR and the single currency’s display of safe haven behaviours over the past year or so to be dampening demand for the CHF.”

“Although fresh news worries stemming from N. Korea has been limited this year, fears of inflation, a more hawkish Federal Reserve and rising US yields can be linked with the market’s retreat to safe havens. The JPY was the only G10 currency and indeed the only Asian currency to outperform the USD last month.  The poor performance of Asian currencies is of particular note.  Although Asian countries are far more resilient than they were in the crisis years of 1997/98, this is still a region with a relatively high level of USD dominated debt.  This means Asian currencies are set to be particularly sensitive to a reduction of USD liquidity.  Motivated by fears that the Fed could be minded to hike rates 4 times this year rather than the 3 that it has been signalling, the IDR dropped 2.4% vs. the IDR vs. the USD last month.  Indonesia has a high level of USD denominated debt per capita and can be considered a bellwether to concerns about USD liquidity.”

“Although a reduction in geopolitical tension is clearly a positive signal for world growth and risk appetite, there are plenty of concerns that suggest the opposite. In addition to worries about central banks tightening, fear of looming trade wars is casting a dark shadow.  It is too early to draw any strong conclusions on how this will pan out this year.  However, safe haven currencies are likely to retain a premium for now.  This suggests that the USD is set to retain a firm bias against many high yielding currencies.  It also implies that the JPY and the CHF are unlikely to give back too much of this year’s gains.  We retain a 3 mth USD/JPY forecast of 107.00.”