Currency Volatility: China, Japan And Switzerland

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The dollar’s rapid rise against the Japanese yen and a basket of other large country currencies has led to fresh suggestions that governments may intervene to support their local currencies. This means Tokyo, Beijing or Berne could begin buying their own yen, yuan or francs and selling dollars—or using other interventionist tools to protect their national currencies. For investors who like currency volatility, here are areas of interest; for those who don’t, beware.

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charging over 12 percent in a mere five weeks, pushing to 20-year highs, expectations of intervention has grown

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The EURCHFs lingers at lows comparable to the exchange rate’s 2015 collapse– egging the Swiss National Bank to attempt a reversal

Currency manipulation is often considered the territory of smaller countries that have little hope of countering the muscle of the greenback or other extremely liquid counterparts. Large countries may join the game, if they haven’t already.

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China’s Hand in the Yuan

One very prominent exchange rate where there is likely significant, ongoing intervention is the US Dollar to Chinese Yuan (USDC)
NH) cross. Approximately a decade ago, China made strides to loosen its control over the previously managed exchange rate. However, as significant as the shift was from a total exchange rate control policy to a more market-determined rate, the hallmarks of directions have remained. Back in August 2015, the People’s Bank of China said it had devalued the yuan; which saw the currency dropping as much as 6% against the dollar in less than 24 hours. The People’s Bank of China surprised investors with three consecutive devaluations of the yuan renminbi (CNY), taking more than 3% off its value.

Despite Beijing’s 2015 ‘revaluation’ scare, the Yuan’s significant appreciation over the past few years suggests that perhaps the famously export-centric country had taken its hands off of the steering wheel. That is very unlikely. The extremes of 2022 would more likely have driven USDCNH significantly higher as the Dollar more broadly advanced owing to its robust rate forecasts and growth outlook. An April break through 6.40 doesn’t change the calculus much. A further depreciation of the Yuan against the greenback will likely reflect Beijing’s interest in bolstering Chinese exports following the pain for Shanghai’s Covid shutdown and the West’s consternation for China’s support for Russia. That said, don’t expect the USDCNH to accelerate its trend too much.

The Swiss Experience

The Swiss National Bank (SNB) has a history of direct intervention. For approximately three years up until January 15, 2015, the SNB’s principal objective was to keep the EURCHF exchange rate above 1.2000. On that date, the Swiss National Bank announced it was no longer actively keeping the Swiss Franc from appreciating further vs. the Euro. The market for the otherwise very liquid exchange rate ‘greyed out’ without a clear market value. When the market began to price again, EURCHF was trading nearly 19 percent lower than the previous close around 0.98. The market took three years to return to the previous floor. void left by the 2015 flash-crash took over three years to fill.

Now, we find once again the EURCHF exchange rate below 1.0500 – the zone where the pair traded back in 2015 after the policy collapse. Central bank members continue to voice a belief that the Franc is deviating from fundamentals, but the market pays little heed. The rub is that even if the SNB wanted to intervene, it would likely have limited effect against a much larger currency. Until the Euro reverses more broadly – ​​watch the EURUSD for guidance here – bounces for EURCHF will likely find headwinds to bullish interests which drive the market back down.

The Swooning Japanese Yen

Currently, the focus on currency intervention is centered on the Japanese Yen. The currency is falling back into its multi-decade role as a funding currency. Under normal conditions, Japan welcomes a weaker currency as it makes its exports more appealing. Yet, in this hyper-inflation market, a dramatically cheaper currency makes imports far more costly. Japan has intervened in the past to prop up a flagging yen. It is unlikely that its major trade partners will tolerate Tokyo’s open intervention. However, unconfirmed efforts have been utilized by the Ministry of Finance before, and I suspect it is coming again. The higher the Yen crosses, the more intense stealth intervention moves will prove – meaning sharp corrections. To turn the trend fully, we likely have to wait for a full-scale reversal in risk assets like global equities. Without the S&P 500 openly tumbling, evaluate USDJPY and Yen cross slumps as ‘pullbacks’ rather than full bear trends. Ironically, the Bank of Japan (BOJ) has confronted the depreciation of its own currency with efforts to drive up stimulus aimed at keeping the 10-year JGB at its target. That will only further add to USDJPY lift.

The European Behemoth

Where direct currency intervention is frowned upon, the massive scaling of monetary policy may not be. Famously, the European Central Bank’s (ECB) then President Mario Draghi stated that a massive stimulus program would be pursued should the EURUSD exchange rate continue to pressure the 1.4000 level back in 2014. The market would not relent and the central bank made good on its word. The result was a massive tumble of more than 3,000 pips in less than a year. This kind of solution would be attractive if not for the fact that central banks are fighting stability-threatening inflation with generally hawkish policy regimes. In this environment where the programs are extreme, it would be very difficult to leverage the kind of contrast necessary to significantly move the currency. For the Euro presently, the ECB maintains a noticeably more dovish policy stance than the US Fed, but EURUSD is already significantly deflated around 1.0800. If anything, the eventual end of the ECB stimulus will likely tease the Euro higher.


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