Back in January we looked at the CHF/JPY cross and took the view that a tumble back to Y145 and even Y137 could be seen this year. The cross was trading just below Y172 at the time, so this looked like an attractive risk/reward set up. The new highs being made at the moment above Y173 are putting paid to this view and it has to be ‘back to the drawing board’ time.
What went wrong with our view since January? First, the JPY side of the coin saw USD/JPY push above the Y150 zone on a sustained basis with gains to Y160 seen so far this year. The soft CHF vs. the EUR and USD kept the JPY cross from flying higher though, keeping our cross view sort of intact. But over the last week the comments from SNB Chair Jordan at a conference in Korea (‘weak CHF is key risk to Swiss inflation’) sent the CHF surging a bit vs. most currencies, and leaves the JPY cross at new highs.
The weekly chart below points to Y180 risk (top resistance line) with bull flags pointing to much higher levels, if this is what it is. Fans of JPY gains (or even mean reversion ideas) will think that current activity could be in a rising wedge, so if the cross ‘misses’ the top line (doesn’t test it) and more importantly (much more importantly) turns below the rising support line near Y170 then a bigger drop to the red line near Y164 may follow. Keep the latter as the big level to clear in order to help confirm a larger top and put JPY bulls into trend mode. Giving cross bears a bit of hope? The Bank of Japan has just started their tightening cycle. True, they are moving at a snail’s pace, but they are moving. The Swiss National Bank has already trimmed rates, and if the ECB starts their rate cut cycle over the coming week (or months etc.) then the SNB may follow through with further cuts.
Will the SNB pursue a strong CHF policy again in the near term? This doesn’t seem that likely. But it looks like the SNB Chair’s comments caught CHF shorts on the hop last week, see if they use the pullback in the EUR/CHF and USD/CHF as cause to put on CHF shorts again, or if traders take the view that the CHF is set to run strong again. The cross rate below shows one pair that is pretty exposed to either a big continuation of the trend, or set to be whacked. At the moment, still thinking that Y150/Y140 and lower is more likely over the coming 12 months than a big run above Y180 to Y190 – but the trend is your friend, right? Hmmm…
Gerry Celaya, Chief Strategist
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