Welcome to Forex Friday, a weekly report in which we discuss selected currency themes mainly from a macro viewpoint, but we also throw in a pinch of technical analysis here and there. In this week’s edition, we discuss the Japanese yen and Swiss franc after the central banks of Japan and Switzerland both surprised – one opting to remain the odd one out, and the other joining a growing list of central banks trying to battle inflation by tightening its belt.
Japanese yen slides after BoJ inaction
On Thursday, we made the case for the Bank of Japan to alter its monetary policy setting as it was becoming difficult, we thought, for it to remain the sole central bank still trying to suppress yields. It was time for it to join the global battle against inflation, like the SNB did on Thursday and others have done previously. But no, the BOJ decided to keep its current monetary policy stance unchanged, and this caused the yen to give up nearly all the gains it had made over the past several days in anticipation of a surprise.
It looks like the Japanese central bank is more concerned about growth than inflation overshooting. The weaker yen will certainly raise inflation further in Japan, but it will make its exports attractive for foreign buyers.
The BoJ had decided a long time ago that the yen would suffer. But not many people had expected the central bank to continue bucking the trend after the yen’s sharp depreciation in recent months.
Instead, and despite other major banks moving in the opposite direction, the BOJ kept its ultra-low interest rates on hold, and Governor Haruhiko Kuroda reiterated that the BoJ is not considering a policy change and that the “yield curve control is not reaching a limit.”
So, it is back to square one and the yen will likely lose further ground as a result, as the rate differential with other economies keep widening.
Will the market believe the BoJ will continue to press ahead with ultra-easy policy in this macro environment? It remains to be seen. There is also the potential we will see some government intervention if the yen weakens significantly further.
In the slightly longer-term outlook, interest rates will probably rise in Japan anyway. A weak currency means Japan will continue to import inflation, especially as oil prices remain elevated after they skyrocketed in the past few months. If price pressures were to rise further because of the exchange rate remaining weak for a prolonged period, then eventually the BoJ will have to tighten its belt more aggressively.
SNB stole the show
In what was supposed to be a side-show sandwiched between the FOMC and the BOE, the Swiss National Bank interest rate decision meeting stole the spotlight. It hiked interest rates for the first time since 2007 not just by 25bps, but by 50bps and didn’t rule out that there could be more interest rate increases to come. The fact that the SNB said that the franc is no longer overvalued, we saw a sharp rally in CHF across the board.
CHF/JPY breaks to new 2022 highs
Naturally, one of the currency pairs to watch following the divergence of monetary policies of the two central banks is the CHF/JPY. This pair had already been trending higher but following this week’s action, it has broken to a new high above last week’s peak of 137.80. This level is now going to be the key support to watch on any potential dips.
As things stand, it looks like the CHF/JPY is heading to 140.00 and beyond.
USD/CHF heading down to 0.95?
In light of the SNB’s surprise decision, the USD/CHF could be heading further lower. It will need to break THIS trend line around 0.9640 to trigger fresh technical selling:
EUR/CHF heading to parity?
Another pair to watch is the EUR/CHF, after the SNB’s surprise 50 bp hike and euro’s ongoing woes with lack of economic growth, high inflation and the ECB’s lack of any major anti-fragmentation support packages. The EUR/CHF’s breakdown below 1.0220 means we now have a lower low in place following a series of higher lows. The 200-day average also held as resistance. The long- and short-term trends are thus both lower. Next targets are at 1.0100, followed by parity.
Tags: #Forex #Friday #CHF #JPY #EUR