In our 12 March FX Focus CHF: melting safe-haven appeal, we outlined that the CHF had become more sensitive to market drivers such as monetary policy prospects. Considering that the overvalued CHF is keeping monetary conditions tight it cannot be ruled out that further policy easing will be considered in the coming few months. Inflation slowed to a multi-year low in February and the ECB’s aggressive stance is keeping EUR/CHF subject to downside risk.
The BoJ, in contrast, is unlikely to consider further stimulus measures in the first half of the year. Central Bank Governor Abe stressed this week that inflation is expected to pick up strongly in H215, irrespective of it being at risk of slowing further in the short term. It must be noted too that it seems that a weaker JPY from current levels is affecting consumer sentiment negatively. In order to escape deflation sustainably-improving domestic conditions – as reflected in stabilising wage price developments – may be needed. As a result we consider there is further room for diverging monetary policy expectations, to the detriment of CHF/JPY.
Last but not least, the CHF’s safe-haven profile has suffered on the back of intervention risk and prospects of capital controls should low-probability events such as Greece exiting the Eurozone materialise. From that angle the currency should be less attractive than the JPY for taking advantage of rising risk aversion.
On the same note, the ECB’s aggressive policy stance has been behind improving risk sentiment during the past few weeks. Unless conditions change, further rising risk appetite should therefore continue to challenge EUR/CHF to the benefit of SNB easing expectations.
In conclusion, we expect CHF/JPY to underperform regardless of risk sentiment. Although the cross has been trending considerably lower, we expect the downtrend to stay intact for the coming few weeks. As such, we recommend selling CHF/JPY at 120.90 with a stop at 126.90 and a target of 110.50.
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