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Long CHF/JPY, Short USD/JPY

Long CHF/JPY, Short USD/JPY

2011-09-02 14:45:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Yesterday, I said "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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I also noted that "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."

--

Additionally, it was noted "If crowding too heavily into the Franc is outside of your risk tolerance, shorting the USD/JPY could hedge against potential rallies by the Japanese Yen against the Franc."

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Performance thus far from September 1:

- Long CHF/JPY: +1.64% (as expected)

- Short USD/CHF: -1.82% (as expected)

- Short USD/JPY: -0.17% (as expected)

--

As such, there are two fundamental reasons why these trades should continue to move in the expected direction:

1) Europe sovereign debt: the International Monetary Fund confirmed that the European Troika's envoy to Greece has indeed left until mid-September, essentialy cutting off talks with the Greek government. It is becoming apparent that Greece will need further funding; however, the Greek government quickly shotdown the Troika's request for further austerity measures. This situation will boost demand for safety, specifically, the Swiss Franc.

2) Underlying fundamentals of U.S. economy: Today's nonfarm payrolls report will inevitably lead to speculation on further easing by the Federal Reserve, in accordance with their mandate of maximum employment. Cheap money flooding the market will reduce the value of the U.S. Dollar, at minimum on a supply and demand basis. That, coupled with the global economy sliding towards another recession, will boost haven flows, but moreso into the Franc and the Yen.

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