Swiss Franc & Japanese Yen: Devaluing Their Way To Prosperity?

Fundamentals

What a difference a year makes. In early 2008, the Swiss Franc and Japanese Yen were among the favorites of the hedge fund set, as “borrowing” currencies for putting on so called “carry trades”, where one buys a high yielding currency and sells a lower yielding currency. The goal of the trade is to capture the yield difference and hope the price movement on the long side of the trade remains steady or increases vs. the short side of the trade.

However, all that changed, starting with the fall of Bear Sterns in March of 2008 and continued through today, as traders rushed to cover their large positions in these trades as a more “risk adverse” trading mentality is in vogue. The up-shot to this rush to cover was the sharp rise in the value of the Swiss Franc and the Japanese Yen, as traders bought back the short side of the carry trade spreads.

The rising currency has wreaked havoc on Japanese exporters, as the strong Yen hurt profits from overseas sales. The currency rise could not have come at a worse time for Japan, which has been struggling for a decade from a deflationary spiral.

There have been rumors throughout the FX community that the Bank of Japan would need to intervene in the FX market by selling Yen to attempt to weaken the currency. Though there have been no signs of this occurring so far, even the possibility of BOJ intervention has traders nervous of holding a large long Yen position.

There has also been talk that the Swiss National Bank (SNB) may enter the Forex market, but that option is considered more of a long shot. This weekend’s meeting of the finance minister of the G-7 nations did nothing to stop the rise of the Yen or Franc, as no mention was made of helping Japan to weaken its currency. In fact, comments that the economic slump will continue throughout most of 2009 only helped to initially strengthen these currencies, as traders continue to flock to more conservative investments.

Though the rise in the Yen and Franc may still have some room to go, it may not be long before the pain of a strengthening currency on its exports forces the central banks of Japan and Switzerland to cry “uncle” and intervene in the FX markets.

Technicals

Looking at the daily chart for March Yen, we notice what may turn out to be a double-top formation from the December 15th and January 21st highs. Prices have also fallen below the 20-day moving average, and the 14-day RSI is becoming weak. The January 6th lows of 1.0567 should act as major support for the March Yen, with the contract highs of 1.1496 being major resistance.

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