FX | Economy
FX Focus - CHFJPY: SNB and BoJ Embark On Opposing Policy Moves
Posted on| Forecast | Spot | 0 - 3m | 6 - 12m | Long-term |
|---|---|---|---|---|
| CHFJPY | 168.95 | 170.10 | 160.90 | 152.95 |
*Forecasts as of February 2024.
- Of the 10 central bank meetings last week, there were only 2 among the 5 major developed central banks (the rest being EM) that shifted their policy stance – the Swiss National Bank (SNB) easing financial conditions and the bank of Japan (BoJ) tightening (if only marginally). SNB’s 25bp rate cut last week to 1.5% was paired with significant downward revisions to its Swiss inflation forecasts to average 1.4% in 2024 (versus 1.9% in the December forecast), to average 1.2% in 2025 (versus 1.6% in the December forecast) and 2026 to average 1.1%. Since these estimates are well below SNB’s longer term inflation goal of 2%, SNB is likely to follow up with further rate cuts in the remainder of 2024, at least twice more but more likely 3 more times (25bp X 3) at its quarterly meetings in June, September and December. SNB also indicated it will remain active in FX markets if necessary. That would have meant active participation to buy CHF to offset elevated Swiss inflation risks. However, in the current context, Swiss inflation is sharply below SNB’s longer-term goal and forecasts to buy CHF. SNB activity more likely signals CHF selling given its recent push back against CHF strength that is likely partially responsible for the current disinflationary backdrop. SNB has been a net seller of CHF in December and January, signaling its abandoning of the policy to strengthen the Franc to fight inflation.
- Meanwhile, the BoJ exited negative rates last week by raising the overnight rate (TONA) from -0.1% to a 0 to+0.1% range and announced a formal end to its Yield Curve Control (YCC) policy. BoJ also ended its outright purchases of ETFs and J-REITs but in what markets interpreted as being rather dovish, the BoJ indicated it will continue with its monthly bond buying (Rinban purchases) in Q2’24 at close to recent levels and may even conduct unscheduled JGB purchases in the event of a rapid rise in interest rates. There were also no hints of further policy actions. Unsurprisingly, Yen weakened when it ought to have strengthened following the BoJ decision to lift rates from negative. However, Governor Ueda’s comments following the meeting were not all skewed dovish as he acknowledged the virtuous economic cycle is strengthening in Japan. More importantly, he ended the BoJ’s inflation-overshooting commitment to expand Japan’s monetary base until the YoY change in CPI exceeds 2% and stays above the target in a stable manner. This effectively breaks the shackles that have held the BoJ to commit towards an ultra-easy accommodative policy and raises risks towards the BoJ moving earlier and faster to tighten financial conditions via rate hikes and reduced bond buying. The key to this is the magnitude of wage gains (a 31Yr high) won by Japanese unions whose impact is yet to be felt. By the July BoJ meeting, Japan macro nominal wage data for April and May will be released and if the YoY change in earnings clearly exceeds 3% and is clearly reflected in service prices in the price reset timing of the April and May CPI, then the BoJ could possibly further hike rates as early as July, implying that the speed of rate hikes could accelerate. With BoJ potentially lifting rates further and faster and SNB likely cutting rates, this raises the possibility of a sharper convergence between SNB and BoJ rates towards 0.75% in 2025 – which could eventually filter through to the CHFJPY cross potentially causing it to fall more sharply over the medium term.
The CHFJPY cross seems to be peaking at its multi-year highs
Source: Bloomberg, March 23, 2024
