The franc and yen, often regarded as safe havens, appear to be gaining value even though the situation on global markets may be far from crisis-ridden and stock market indices are hitting all-time highs. So what is behind the demand for Swiss and Japanese currencies?
When risk appetite declines among investors, capital could be invested in franc (CHF) or yen (JPY), and then these currencies seem to gain in value. Also key to understanding why the yen or franc attracts capital in crisis situations seems to be a country's net international investment position.
Positive balance of Switzerland and Japan
NIIP (net international investment position), in a nutshell, gives the difference of how much domestic capital is placed abroad and how much foreign capital is invested in a country. If the value is positive, as in the case of Japan or Switzerland (according to IMF data), then in the face of unfavorable events on global markets more capital will be exchanged for francs and yen than will flow from these two currencies to others. This may explain the pattern of so-called safe havens, but also the return of capital to its country of origin.
The current situation on the markets does not seem to be in a crisis. The Euro Stoxx, DAX, S&P500 stock indices are at all-time highs. Gold costs about $1800 per ounce and is not showing the increases that could occur in crisis situations, and the VIX index contract is at 20 points. This is an increased value from the previous average in the area of 15 points, but it is not very high either. Meanwhile, the franc against the dollar today was the strongest since mid-June (0.9040) while against the euro it was the strongest since November 2020. (1,0720). The yen, on the other hand, against the dollar was trading at 108.80 today, which means it was the strongest since May 2021.
Delta one of the reasons
The strengthening of the so-called safe haven currencies despite the optimism on the stock markets could be explained by the slowdown in the global economic rebound, which in turn may be related to the spread of the delta mutation of the coronavirus.
Another element: recent data showed that Swiss industrial activity rose to a new record high in July, inflation in turn rose to a level not seen in more than two years - 0.7 percent.
On the monetary policy front, the Swiss National Bank said it would maintain an expansionary monetary policy to ensure price stability and continued support for the Swiss economy as it recovers from the effects of the coronavirus pandemic. The central bank raised inflation forecasts to 0.4 percent in 2021 and 0.6 percent in 2022 and 2023, on the back of higher prices for petroleum products and tourism-related services, as well as goods affected by supply constraints. Switzerland's GDP growth has also been revised upward to 3.5 percent for this year and is likely to return to pre-crisis levels soon.
On the other hand, Japan is the largest creditor of the United States when it comes to the bond market. It appears that the recent drop in yields on U.S. paper may also be pulling some money out of the market there and back into Japan. According to CFTC commission data and a COT report, speculative investors seemed to have opened large positions on the yen's decline a month ago. Now they may be closing them. This means the need to buy back JPY, which in turn may affect the observed strengthening of the Japanese currency.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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