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Pending Long CHF/JPY, Short USD/JPY

Pending Long CHF/JPY, Short USD/JPY

2011-09-01 15:29:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Earlier this week, I was discussing a potential breakout opportunity to the downside in the CHF/JPY pair, considering the volatility expectations and an exceptionally extreme SSI reading of over +9. However, as the SSI has faded, down to +7, and now that Swiss government officials are discredting the Swiss National Bank's ability to weaken the Franc, we've seen the low-yielding currency retake its role in recent days as a safe haven. As such, with Swiss weakness literally pegged to a peg against the Euro, anything short of that policy action will be generally disregarded by market participants over the medium-term. Accordingly, the CHF/JPY pair looks to strengthen as haven flows move back into the peaceful European nation's currency.

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Similarly, with the Swiss Franc readying to firm up once more, any excess haven flows in the U.S. Dollar are likely to be unwound, with some of that capital shifting back overseas to Europe. Following the previous logic outlined above, the USD/CHF pair should weaken as well.

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Looking to hedge against some of this exposure, but with the bias still in favor of risk-aversion now that September has started and volume should pick back up (see here re: higher volume begets losses for riskier assets, such as U.S. equity markets), a head and shoulders pattern has formed on the hourly USD/JPY charts. As such, if crowding too heavily into the Franc is outside of your risk tolerance, shorting the USD/JPY could hedge against potential rallies by the Yen against the Franc.

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