JPY, CHF flows: JPY reverses gains but CHF weak

USD/JPY has reversed yesterday’s decline following Ueda’s remarks overnight, in which he appeared to row back slightly on the comments from Takata that helped to spur JPY gains on Thursday. Even so, the prospect of a BoJ tightening in spring at the April meeting remains live, provided the evidence of higher wage settlements in the spring round is forthcoming. There hasn’t been much movement in yields overnight, either in Japan or elsewhere, so USD/JPY remains at levels that look expensive relative to the yield spread correlation that has heled for the last few years. But JPY crosses continue to be supported by the low level of risk premia, and with a firm tone to equities overnight, we wouldn’t see much scope for JPY gains on the crosses against the riskier currencies unless we some some significant bond or equity developments today, which look unlikely given the dearth of significant calendar events.

However, the JPY has retained yesterday’s gains against the CHF, with EUR/CHF trading up to its highest since December at 0.9578 overnight. CHF/JPY is still contained in the 169.30-171.80 range that has held since January 10, but pressing the bottom end. As we have noted before, CHF/JPY is the simplest valuation play in the market, having risen more than 50% in the last 4 years with minimal support from rising yield spreads. While other pairs are complicated by the different inflation pictures in the different countries, requiring adjustment for inflation to see the true extent of JPY weakness, there has been very little difference between the Swiss and Japanese inflation pictures, so the nominal currency move is very similar to the real move. A break below the 169 area in this pair could be a trigger for a sharp move lower. There is also scope for more general CHF weakness after years of strength supported by low global yields, some safe haven demand and SNB selling of FX reserves. However, the CHF is not as strong as it looks in nominal terms (just as the JPY is even weaker than it looks) because of the relatively low Swiss inflation performance in recent years, so we only look for steady EUR/CHF gains towards 1.00.