Safe havens USD, CHF and JPY in play - Rabobank

Jane Foley, Research Analyst at Rabobank, notes that in the past few sessions there has been a resurgence of geopolitical news but the market reaction has been muted especially of the safe haven currencies. 

Key Quotes

“Since the end of last week, the safe haven yen has indeed outperformed the USD.  However, this outperformance is marginal.  The upward bias in USD/JPY this morning clearly suggests that safe haven demand for the yen has been overwhelmed by the reassurances from BoJ Governor Kuroda that it is “too soon to discuss raising the long-tern yield target” and that the BoJ “won’t raise long-term yield target due to hikes abroad”.”  

“The USD does not have a straightforward role as a safe haven currency.  The existence of a current account deficit in addition to a budget imbalance in the US suggests that the greenback is far from the text-book ideal of a safe haven.  That said, the appeal of the treasury market in times of crisis and the huge liquidity available in USDs suggests that the greenback can provide a valuable service to those seeking a safe haven asset.  Given the current consensus view that interest rates are trending higher in the US, it is reasonable to assume that the USD could perform well as a safe haven in the coming months.”  

“We have frequently argued that the strength of Swiss fundamentals makes the CHF the best safe haven currency on paper.  Switzerland boasts a large current account surplus and a more or less balanced budget.  Also, despite CHF strength (or perhaps because pressure to work around it), Switzerland is frequently named the most competitive economy on the planet.  However, the overvalued exchange rate has been the source of a lengthy period of deflation in Switzerland and is the thorn in the side of the SNB.  At last week’s policy meeting SNB President Jordan warned that rates could be pushed further into negative territory.  The SNB has also made clear that it considers intervention a policy tool.  Unsurprisingly this policy has had some success in undermining the attraction of the CHF as a safe haven in the past 18 months or so, and we see scope for further upside in USD/CHF towards 1.04 on a 3 mth view.”  

“Both President Putin and Erdogan have commented that latest fatal attack in Ankara was aimed specifically at undermining the normalisation of the relationship between Turkey and Russia.  The implication is that a diplomatic conflict is likely to be averted.  The act of terror in Berlin, however, could have a far reaching impact if it sparks further support for the far right in Germany.  This could further weaken Germany’s liberal leadership in the 2017 elections.  Such events could also boost the far-right’s chance of winning the French President elections next spring – though recent opinion polls currently heavily dispute this.  It is our central view that the far right will not be able to form a government in either France, Germany or the Netherlands next year and that the EUR should end the year a little more emboldened.  However, with the coherence of EMU at stake, 2017 promises to be a testing year for European politics and one which could boost the safe haven behaviours of the USD.”