Goldman, BofA Favor Swiss Franc Over Yen as Haven Bet

(Bloomberg) — Goldman Sachs Group Inc. and Bank of America Corp. strategists are backing the Swiss Franc over the yen, with rising political uncertainty undermining the appeal of the Japanese currency as a safe-haven asset.

“Long CHF/JPY may be the cleanest trade to express JPY‘s fiscal risk given CHF‘s healthy fiscal profile and increasing risk premium for USD and JPY, the traditional safe haven currencies,” Bank of America’s chief Japan FX and rates strategist Shusuke Yamada wrote in a note Monday. The bank recommends going long the Swiss franc against the yen, with a target of 189.

The view is echoed by Goldman strategists including Michael Cahill, who said that “fresh political uncertainty in Japan should be supportive for CHF and, to a lesser extent, EUR,” as both currencies stand to benefit from US growth worries and sequential Federal Reserve rate cuts.

The yen, already the worst performing G-10 currency over the past three months, has come under additional pressure after Prime Minister Shigeru Ishiba said he would resign, which has opened the door to successors favoring looser fiscal policy. Diverging central bank paths are also supporting the currency pair, which hit a fresh record high this week. The Bank of Japan’s policy normalization is clouded by political uncertainty, while the Swiss National Bank appears to have reached its rate floor amid a pickup in inflation.

What Bloomberg strategists say:

CHF/JPY looks set to grind toward the once-unthinkable 200 mark as the yen slumps under the weight of Japan’s leadership transition.

Contrasting central bank positions also support a higher cross. On the yen side the likelihood of the Bank of Japan being able to hike interest rates this year is decreasing by the day amid messy domestic politics.

— Mark Cranfield, Markets Live Strategist. Read more on MLIV.

The Swiss franc has been favored by some investors in recent years thanks to Switzerland’s strong macro fundamentals. Japan’s negative real yields stand in contrast to Switzerland’s mildly positive ones, and while the Asian nation has a sizable current-account, the surplus is largely driven by investment income that’s often reinvested abroad. Its trade balance, in contrast, has mostly been in deficit since 2011, while Switzerland’s trade surplus has been expanding.

According to the International Monetary Fund’s data, the Swiss franc’s share of global allocated foreign-exchange reserves in the first quarter was 0.18%, same as the prior period. That compares to 5.15% for the yen.

(Corrects last paragraph to reflect the IMF’s updated figure for Swiss franc’s share.)

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