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#66 - Early signs of a potential CHFJPY reversal?

We maintain our bearish stance on USDJPY for 2024, as previously discussed, but had temporarily moved to the sidelines ahead of the December BoJ meeting, considering the market's overly high expectations for a rate hike. However, with USDJPY retracing a significant portion of its decline since mid-November and with another BoJ policy meeting on the horizon, we are considering re-establishing long positions in JPY. Our preferred strategy involves shorting CHFJPY, which has recently soared to record highs, surpassing 171. The Swiss franc has outperformed in 2023, appreciating approximately 9% against the USD and showing strong gains in real effective terms (REER). The CHF is currently at its strongest REER levels since the removal of the EURCHF floor in 2015, exceeding 2 standard deviations from the 5-year average.

The Swiss National Bank (SNB) has embraced the Swiss franc's appreciation, adopting a dual approach to contain inflation. This approach not only includes raising the policy rate to 1.75% but also involves supporting the currency by selling foreign exchange in case of CHF weakness, a practice that started in Q4 2022. This strategy has proved effective, as inflation has remained under control, never exceeding 3.5%, and currently sits below the 2% target.

In a recent conversation with Bloomberg at the WEF in Davos, SNB Governor Jordan reiterated the stance from the December meeting: further real appreciation of the CHF is not favorable, especially considering the below-target inflation, a decelerating economy, and the pressure that firms are facing due to the strong CHF. We interpret these comments as an indication of potential CHF weakness ahead, leading us to anticipate underperformance of the CHF moving forward.

From a technical standpoint, CHFJPY has seen a sharp increase, aligning with the overall weakness of JPY following the BoJ's decision to maintain its policy in the December meeting. However, we observe that the momentum of this rise is diminishing, presenting a favorable risk/reward scenario to position for a decrease to at least 166, if not into the low 160s.

The major event risk lies in the upcoming BoJ meeting next week. The consensus does not anticipate a policy change, aligning with our own expectations. Nonetheless, any unexpected move by the BoJ could significantly boost the JPY, especially considering the current high levels of JPY shorts among leveraged players, as indicated by the latest CFTC data. Risk to the trade is two closes above the 171.80 highs, in which case we would review the trade idea.

Good Luck

Team MacrometR & FinBrix No Financial Advice.


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