Swiss Franc: Downside risks build against Yen as policy diverges – DBS

DBS Group Research strategist Philip Wee highlights growing downside risks in CHF/JPY after the cross failed to re-enter its February–July 198–204 range and slipped to 193. He notes scope for a move towards 186, citing monetary policy divergence as the Bank of Japan (BoJ) is expected to hike while the Swiss National Bank (SNB) keeps rates at 0%, reducing the Swiss Franc’s (CHF) yield appeal.

Policy divergence weighs on Franc

"The downside risk in CHF/JPY has become more evident."

"The cross rate failed to reclaim its February-July range of 198-204 and has fallen to 193, its lowest level since December. This leaves the door open for a further decline towards 186, around its 100-week moving average."

"First, monetary policy divergence increasingly favours the JPY over the CHF."

"The market has a near-100% conviction that the Bank of Japan will hike by 25 bps to 1.25% at its September 18 meeting. The BOJ has signalled that if underlying inflation evolves in line with its forecasts, financial conditions remain sufficiently accommodative to accelerate policy normalization."

"By contrast, the Swiss National Bank has zero incentive to raise its 0% policy rate at its September 24 meeting. Switzerland’s headline and core CPI inflation remain near the lower bound of the official 0-2% price stability range. Unlike many of its peers, the SNB is looking through the energy-driven rise in inflation. Keeping rates low reduces the CHF’s yield appeal while supporting domestic credit and employment."

"Second, CHF/JPY faces asymmetric FX intervention risks."

"The late-July joint FX intervention demonstrated that Washington shared Tokyo’s urgency to arrest the JPY’s disorderly depreciation. This coordination also redirected investor scrutiny of the fiscal deficit and debt sustainability from Japanese Government Bonds to US Treasuries. Conversely, SNB has repeatedly signalled its readiness to counter excessive CHF appreciation that threatens Switzerland’s export-reliant manufacturing and pharmaceutical sectors."