Swiss Franc Hits Record vs Euro; Yen Gains

By Marc Chandler On Aug 31, 2010

The BBH CurrencyView

Highlights

The Swiss franc rose to a record against the euro while the yen also continued to edge higher through the Asian session as some improved Japanese figures failed to dent the risk-off momentum. EUR/CHF dropped as low as 1.2933, and USD/CHF dropped to 1.0227, near the 8-month low of 1.0221 reached Friday. EUR/JPY hit a low of 106.25, less than a big figure off the 15-year low touched last week. USD/JPY ground down to 84.08. Japan’s industrial output unexpectedly rose in July, while retail sales, wages and housing starts all climbed more than expected. India said GDP grew 8.8% in Q2, as expected, but the fastest pace in 2 ½ years. South Korean industrial production beat expectations and Australia released a bevy of strong data: current account, retail sales and building approvals numbers. The yen and Swiss franc led gains vs the dollar overnight, and for the month they were the only two G-10 gainers vs the greenback. EM currencies lost ground through Asian trading, with PHP, KRW and RUB leading declines. On the month, CLP and THB led the way higher, while there were losses for PLN, CZK, MXN and HUF.

Asian stocks declined as caution gripped financial markets. The MSCI Asia Pacific index fell 1.5%,wiping out yesterday’s advance and set for a 3.5% decline on the month. Japan’s Nikkei led declines in the region, plunging 3.5%, its biggest drop since June 7. There were losses in Hong Kong, Taiwan, Australia, Korea, India and Singapore. Futures on both European and US markets are trading lower.

Bonds climbed, with German bund yields falling to a record low. Japanese 10-year JGB yields dropped back below the 1% mark, down 5 basis points to 0.96%. European bonds opened sharply higher, with the Germany’s 10-year bund yield down 4bps 2.085%. US Treasuries gained, with 10- and 30-year yields down 3bps to 2.5% and 3.55% respectively.

Currency Markets

The Swiss franc rose to a record against the euro while the yen also continued higher as some improved Japanese industrial production and retail sales figures failed to dent the risk-off momentum. The Swiss franc touched a record high vs the euro, with the pair declining to 1.2934, and USD/CHF dropped to 1.0227, near the 8-month low of 1.0221 reached Friday. EUR/JPY hit a low of 106.25, less than a big figure off the 15-year low touched last week. USD/JPY ground down to 84.08. Japan’s industrial output unexpectedly rose 0.3% in July from a month earlier, after a drop of 1.1% in June. That left production up 14.8% from a year ago, more than expected. Retail trade rose 3.9% from a year ago in July, more than the 3.5% expected and up from 3.3% growth in June. Other figures showed wages grew 1.3% from a year earlier and housing starts gained 4.3%, more than twice as much as expected in July. The fact remains that the Bank of Japan’s policy response yesterday were entirely within the expectations of the market, and didn’t give a compelling reason to stop buying yen. As for intervention, it still seems unlikely as it would be a unilateral move and thus relatively ineffective. The decision to intervene is the Ministry of Finance’s and it is still obviously reluctant to follow that path. It is not just that its experience (2003-2004) was not inspiring, but also the Swiss National Bank did not appear to enjoy any more success with its massive operation earlier this year. American and European officials are clearly reluctant to join an intervention operation. That said, if the Japan were to intervene in the foreign exchange market outside of its time zone, it would likely give the funds to the ECB and Fed in which they would use to execute Japan’s instructions. This would not be the same as coordination. Note that Kan faces a leadership challenge from Ozawa on Sept 14. The early newspaper polls show Kan enjoying as much as a 4 to 1 lead over Ozawa who was forced to resign over a funding scandal involving aides a few months ago.

There were some strong data releases from elsewhere in Asia overnight. India said GDP climbed 8.8% in the second quarter from the same period a year ago – that’s the fastest pace of growth in 2 ½ years. It was up from 8.6% growth in the first quarter and matched economists’ expectations. The Reserve Bank of India has been making noises about the dangers of inflation, saying last week that its priority was reining in consumer prices. With economic growth steaming along at such a pace, expectations of further rate hikes will be reinforced. The central bank tightened policy last month by raising the reverse repo rate 25 bp to 5.75%, the fourth tightening move in five months, and recently predicted growth for this year at 8.5%. The next meeting is Sept 16. South Korean industrial production climbed more than expected in July, its 13^th straight monthly gain. Output rose 15.5% from a year earlier, slower than the 17.1% advance in June, but more than the 15.2% pace predicted.

Australia released a bevy of strong data overnight, dampening concerns that the slowdown in the US and Europe in recent months may weigh on growth, fears voiced by the central bank. The current account deficit contracted to the smallest since 2002 in the second quarter, while there were gains in building approvals and retail sales in July. The deficit narrowed to A$5.64bln from A$16.4 bln in the first quarter, more than expected, and the report added that exports contributed 0.4% to Q2 GDP which was a 0.9% quarterly gain. Retail sales climbed 0.7% from a month earlier, more than the 0.4% growth expected, and the highest jump in four months. Building approvals rose 2.3% from the previous month in July when analysts had forecast a decline. New Zealand building permits climbed 3.1% in July from the previous month, more than the 2% expected but down from 3.3% in June.

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