CHF/JPY: Bulls step in and give the cross some temporary relief on SNB comments

CHF/JPY is currently trading at 108.02, travelling between a range of 107.57 and 108.04, up -0.28% on the session so far. The cross is a popular one in current market conditions with respect to the risk-off battle between the two currencies.

The markets are weighing up the risks involved in using the CHF vs the Yen considering the Swiss National Bank's position when it comes to protecting the strength of its currency. As we approach the European Central Bank decision next month, as well as the SNB's, board members are jawboning the currency lower, with today's statements made by Andréa M Maechler, Member of the Governing Board, who said the following:

• Negative rates are working, still, have plenty of room for fx intervention.
• The attractiveness of CHF has ‘enormously increased’.
• Expansive monetary policy remains necessary.
• Reaffirms pledges on FX intervention, negative rates.
• Swiss inflation pressures remain weak.
• Negative rate is important because it helps reduce the attractiveness of the Franc.

Indeed, so far, August has been defined by a surge in demand for safe-haven assets and this is very apparent to the SNB who will seek to keep their currency under control, clearly concerned for developments overseas and in mainland Europe, as well as needing to firefight against low inflation domestically. 

Indeed, the CHF has been gaining ground vs. the EUR since late April, partly be attributable to a pick-up in expectations about the prospects of further forthcoming policy easing by the ECB. We have seen net positions in the JPY climbing into positive territory for the first time since late 2016. By contrast, we had seen a late uptake in the CHF until last week where CHF short at 11k vs 13k short the prior week leaving shorts trimmed by 2K according to forex futures positioning data among noncommercial traders for the week ending August 20, 2019.

CHF/JPY positioning and safe-haven flows

What does this mean? Wen compared to JPY long 31K vs 25K short the prior week,  and thus longs increasing by 6K, the market is clearly favouring the Yen as its preferred go-to place in times of uncertainty and risk-off markets - But it also means that CHF/JPY is at risk of a correction higher as sentiment turns  - which is what we are seeing today. CHF/JPY has climbed back to the 108 handle despite the SNB attempting to jawbone the currency lower while USD/JPY climbs, tracking the DJIA rallying around 1%. However, when, not if, risk-off markets return, perhaps on further trade war escalation headlines, poor economic data releases and/or dovish/bearish central bank rhetoric, CHF/JPY has shown us who is king of risk-off flows and higher levels are likely a fade on rallies. 

The risk to long CHF is that the SNB will continue to hammer a bearish drum going forward and will be in fire-fighting mode.

"The optimal backdrop for an effective policy pass through for the SNB would be strong and stable growth in the Eurozone and a return to healthy levels of risk appetite. In the absence of this the outlook for the CHF will be dominated by safe-haven demand. We see scope for the CHF to lose a little ground vs the JPY in the coming months,"

analysts at Rabobank argued. 

CHF/JPY levels

The 108 handle is a key area with the August 1- 12 support. On the 4hr-chart, the price is resisted by the slower GMMA span but has had a tendency to pierce the span by 20% in this fresh bearish cycle which, on a break of the 61.8% Fibo retracement target of the May 206-2018 high at 108.20, brings in an upside target of 108.50, with confluence of the 38.2% Fibo where the price would be expected to run into supply and resume its downtrend. However, on a continuation bull will look to recover to the 61.8% Fibo at 109.10. On the downside, we have a triple bottom, bar the flash crash low, in the 107.60s and a break below there opens risk to 106.40 ahead of the 78.6% Fibo retracement target of the May 206-2018 high.