Uncertainty Drives Yen and Swiss Franc Higher

BBH CurrencyView

North American Update

• US dollar mostly weaker versus majors
• USD/JPY reaches record low as uncertainty remains elevated; G7 to discuss
• Swiss franc stronger on safe haven bids; SNB remains on hold

The dollar declined against most currencies today. The yen is 1.5% stronger trading around the 78.50 level after a very volatile session, the euro is up nearly 1% and other European currencies are roughly 0.5% higher. The last leg up to the euro followed the strong results of Spain’s bond auction, with the bid-to-cover rising to 1.81 from 1.54 in February. Spanish sovereign debt yields are 4bps high, in line with the broad moves in euro-zone countries and an increase of 3 to 5bps higher across the US Treasury curve. Elsewhere, India’s RBI raised its benchmark rate to 6.75%, while the SNB remained on hold. Asian equity indices closed lower after a decline of 1.4% in the Nikkei, but equities recovered in Europe rising around 1% as the prospect of a G7 conference call tonight has bolstered confidence. US equity futures are pointing to a 0.9% positive open. Oil prices extended their gains and are up around 1.5% on day.

The USD/JPY level is news in and of itself, but the extreme volatility during the usually quiet period overnight between the NY close and before Asia fully opens was noteworthy. USDJPY quickly dropped 2 ½ big figures to a new low of 76.36, and then gradually retraced the entire move. The violence of the move fits with our view that the flows into yen are largely speculative rather than due to repatriation. There are no signs of BOJ intervention however, the BOJ did add another 6 trillion yen to the financial system today, bringing total emergency injections this week to over 60 trillion yen, equivalent to about $750 billion. With no sign of the BOJ, we expect traders to look to retest the downside in USD/JPY today. Japanese ministers and insurance companies have stated that there has been no repatriation. Ministry of Finance data released for the week of March 11, including the day of the earthquake, shows no sign of Japanese repatriation to that point. Japanese investors bought about $10 billion net in overseas bonds and notes for the week, and were mostly flat on a net basis in equities and short term securities investments. Some more data to help understand Japanese flows is from the Tokyo Financial Exchange. There, futures contracts held by speculative accounts, primarily retail, are about 90% holding long USD/JPY positions as of March 16, again providing no indication of a flight to JPY by Japanese investors. The nuclear concerns remain, with conflicting comments by government officials, TEPCO and foreign officials regarding the condition of fuel rods, containment vessels, spent fuel storage pools and radiation levels. Most importantly, the possibility of a catastrophe remains.

In the wake of the MENA conflicts and the escalating crisis in Japan, the Swiss franc is amongst one of the top performers in the G10 and remains bid today. Although the EUR/CHF traded at highs near 1.27 after the SNB left its key labor target unchanged at 0.25%, the Swiss franc on the day remains bid versus the euro and indeed versus dollar as risk aversion keeps safe haven currencies firm. Overall, the SNB continues to keep its policy rate at record lows, despite underlying strength in the Swiss economy. Nevertheless, it is clear that policy makers are beginning to shift their attention to domestic inflation pressures, which are growing steadily as the output gap closes. OECD estimates suggest that actual economic growth is only about 1% from potential. The bank lifted its inflation forecast and repeated that the current expansionary policy can’t be kept over the policy horizon. However, at the same time, the SNB said uncertainty is high and warned that geopolitical tensions may spark "renewed tensions", as Japan has added a "new element of risk". It appears that the SNB is willing to keep its options open in light of the uncertainty and may have disappointed some medium-term buyers by not laying the ground work for a rate hike in June but nonetheless the swissy is likely to remain firm as safe haven activity will continue to dominate in the near-term. As a result of the ongoing bout of risk aversion, the EUR/CHF is likely to remain below 1.27.