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FUNDAMENTAL ANALYSIS

CHF/JPY: The World Turned Upside Down

8 Jun 2016

The Japanese and Swiss economies share some fundamental characteristics. Both nations have few natural resources and both must import energy needs. Both nations are export economies and both nations are sensitive to currency exchange rates with major trading partners. In fact, the health of both national economies depends on export price stability. Last, but not least, the Yen and the Franc are both considered safe haven currencies.

So it stands to reason that the central banks of both nations would have similar goals. However, for reasons which are baffling most economists including Bank of Japan Governor Haruhiko Kuroda, the Japanese Yen continues to strengthen against the currencies of its major trading partners.

It’s important to note here that Japan and Switzerland engage in very little bilateral trade. About 0.56% of Japanese exports are destined for Switzerland and about 2.3% of Swiss exports are destined for Japan. So it may be assumed that the central bank policy of one, is not a major concern of the other.

The Swiss National Bank has done about everything it can do to weaken its currency and makes no secret about it: it has been a stated goal for well over a year and particularly targets the ‘safe haven’ dimension of the Swiss Franc. In its most recent policy assessment meeting1 the SNB clearly notes that “...The Swiss franc is still significantly overvalued. Negative interest is making Swiss franc investments less attractive. At the same time, the SNB will remain active in the foreign exchange market, in order to influence exchange rate developments where necessary...

Further, the SNB clearly makes clear its concerns as to what extent the ‘significantly’ overvalued Franc is having on the economy: “...annualised real GDP increased by 1.7% in the fourth quarter. Thus, for 2015 as a whole, the Swiss economy recorded growth of just under 1%... ...Profit margins are still under pressure at many companies, and the willingness to invest and the demand for labour remain commensurately subdued. Consequently, the unemployment rate has risen again slightly in recent months...

The SNB has suppressed rates about as far as rates can be suppressed for this economy: “...The target range for the three-month Libor remains at between –1.25% and –0.25%, and interest on sight deposits at the SNB is unchanged at –0.75%...

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