Moves in the yen and Nikkei are drawing increasing attention from the blogosphere. But this is very difficult to trade now. On the one hand, you have a better U.S. economy, perhaps QE tapering, and a strong trend in the yen, so perhaps it could keep falling. On the other hand, the Fed might see these signs of instability (U.S. Treasury yields going up rather too fast etc) as a warning against too speedy a retreat from QE and BoJ has not really done anything that would keep the yen falling. So it's a mixed bag.
But the Swiss franc (FXF) is far more interesting, and here's why:
1) Safe havens, are you kidding me?
At the start of the year, investors could roll safe havens off the tip of their tongue. Japanese yen! Gold! Australian dollar! Treasuries! Then they all crashed or fell in price significantly. Maybe only German bunds are left standing. But even German 10-year bund yields rose 0.3% in May.
So the concept of safe havens has been shattered. Everyone realizes how fragile anything could be and there's no safe asset to hide in. Perhaps some assets are better than others and would return principal, but nothing is guaranteed to avoid major market value losses in the foreseeable future.
Under such a headwind, how much longer can the Swiss franc keep its rather high value as the only safe haven not to have suffered tremendous declines this year?
2) Euro-Franc Cap secure
The Swiss National Bank (SNB) has repeatedly affirmed its intention to keep the Euro-Swiss Franc 1.20 cap in place. It installed this cap in September 2011, when the franc was surging as a safe haven.
Since then, the SNB's governors have continued to assure the market it will keep the cap in place almost every month. "SNB's Zurbruegg says cap still needed, franc overvalued"(here), or "[SNB President]Jordan says SNB committed to franc cap, could adjust if needed" and even a hint of potential negative interest rates. (here)
The SNB's commitment is probably viewed as credible. A test would be the turbulence caused by the Cyprus bail-ins in March, as the SNB's forex reserves rose by only 2% or 8 billion francs in March, and declined by 1% in April. Barring extended periods of crisis, money just isn't that willing to flooding into the franc anymore.
SNB has been largely censure-free from the international community too (well it hasn't done anything in almost two years).
For example, "The SNB should maintain its cap on the franc, given low inflation and growth and the risk of further capital inflows, the IMF said in the report, compiled early in May before the franc hit multi-month lows against the dollar and euro."(here)
Though of course it hedged and suggested that "the authorities should also take full advantage of any capital outflows to unwind past currency interventions." I think the point is pretty obvious: the international community is nowhere near unhappy with the SNB's policy, so that gives it more leeway to get away with innovative measures, if it wants.
3) Franc devaluation possibility not priced in
Since April, correlations between USDCHF and USDJPY have been very high. From April 1, present, the hourly correlation is 0.9293 while for the past month, the 15-minute correlation is 0.9293 as well.
It appears the market is essentially treating these two currencies as equals right now, which doesn't make a lot of sense. The USDJPY has gone from 78 to 100 in half a year, while the USDCHF has barely gone anywhere. The USDCHF has also tended to track USDJPY movement in the past few days when the yen rose sharply.
When the Yen Soars...Forget About the Yen!
Combining the three lines of thinking above, the franc might see some serious devaluation if things get better going forward or the SNB just wishes it. After all, isn't that what just about everyone is doing these days. However, currently I'm considering this only if the yen soars very sharply (due to Japan stabilizing bond yields through stabilizing the yen as I've covered before), dragging the Swiss franc up as well. That would provide an excellent entry point.
EUR/CHF is at 1.2369 now and has tended to spike down when the yen rose sharply against the dollar in the past few days. If it falls to 1.22 or so, that would only mean 200 pips downside risk, for a lot of upside whether things improve in Europe or the Fed tapers. And if things get a lot worse in Europe, then there will be time to unwind the position at a small loss. before something unthinkable like the 1.20 cap breaking happens. This might be something holders of (EWL) could factor into their considerations as well.
Additional disclosure: Actually mainly considering long EURCHF if Yen rises sharply and EURCHF falls a lot and consolidates