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Jane Foley, Senior FX Strategist at Rabobank, explains that the JPY and the CHF are both well-established safe havens and from time to time other currencies can exhibit safe haven behaviours.  

Key Quotes

“In 2017, this was periodically true of the EUR.   That said, this year’s return of concerns about Italy’s fiscal restraint is a reminder that the Eurozone’s crisis years are too recent to allow the single currency to adopt the mantle of a true safe haven, despite the region’s huge current account surplus.”

“The USD has only a flirtatious claim as a store of value.   Its huge liquidity, importance as a reserve currency and the role of Treasury paper as a safe haven asset means that the USD has strong safe haven links.   However, the US’s budget and current account deficits significantly undermine any claim that the USD is a true safe haven currency.”

“Since the SNB maintains the use of FX intervention as a policy tool, it is reasonable to assume that the JPY may be the safe haven currency preferred by many investors.”

“While the CHF may be more reactive to news from Russia and Europe, the JPY can appear more sensitive to news stemming from Asia. The JPY responded to worrying news regarding N. Korea’s nuclear capability in the early part of 2017. Interestingly, the JPY seemed to become less sensitive to N. Korean related news into last summer, despite the worsening tone of the headlines. We have linked this to the broad strengthening of overall risk appetite during 2017 as world growth beat expectations.”

“The role of the JPY and CHF as safe havens has long since provided a problem for both the SNB and the BoJ, since unwanted currency strength has contributed to deflationary pressures.”

“Risk appetite rather than interest rate differentials will continue to be overriding driver of the value of safe haven currencies in times of heightened market tensions.”

“According to the OECD’s measure of purchasing power parity, the CHF is currently around 40% overvalued vs. the EUR and about 23% overvalued vs. the USD. The impact of the strong CHF is very evident in Switzerland’s inflation rate. CPI inflation held at 0.8% y/y in April and last traded above the 2.0% y/y level back in 2008 – and then only briefly. While Japan also struggles with a low inflation rate, using the OECD’s PPP measure the JPY is less than 3% overvalued vs. the EUR and about 10% undervalued vs. the USD. The BoJ has had far greater success at weakening its currency than the SNB. Over the past few years the BoJ’s measure of Japan’s effective exchange rate has held close to at its weakest levels since the 1970s, though this is related to the changing composition of the country’s main trade partners.”

“Broadly speaking, due to the risk of FX intervention from the SNB we favour the JPY over the CHF as a safe haven currency. That said, although JPY/CHF is below its recent high, it is currently trading towards the top of the range that it has maintained since the start of last year. This suggests there is potential for JPY/CHF to become overstretched. Another factor favouring the CHF currently is the reappearance of fiscal concerns in the Eurozone, specifically in Italy. On the back of this, we would expect JPY/CHF to head back towards the 0.8930 area near-term.”