Jane Foley, Research Analyst at Rabobank, suggests that measured from the start of the year the JPY is the best performing G10 currency on the back of safe haven inflow while through the month of January the EUR was the second best performing currency.
Key Quotes
“Last year the EUR began to show safe haven characteristics which we frequently argued were due to its position as a funding currency and the Eurozone’s large current account surplus. That said, EUR/JPY has been in a downtrend since the middle of last year.
In recent sessions the falls in EUR/JPY have accelerated taking the pair back to levels not seen since 2013. The most recent falls in EUR/JPY are being influenced by concerns about the implications for EU coherence if there was a Brexit later this year. This appears to be testing the ability of the EUR to absorb safe haven flows.
Ideally a safe haven currency would be liquid and be associated with both a current account and budget surplus in addition to trustworthy and credible systems of government, law and monetary policy. Arguably the CHF comes the closest to ticking all of these boxes. Perhaps unsurprisingly, safe haven demand has been the menace of the SNB for decades. Despite employing negative interest rates and threats of FX intervention, the CHF remains significantly overvalued.
Some commentators are warning that a Brexit could weigh on the EU both economically and politically. The result has been a drop in the value of EUR/CHF in recent sessions. Even if doubts over the future of the EU were to gain more momentum, there are no guarantees that EUR/CHF would remain under pressure. Certainty, such a scenario may create doubts over the outlook for some peripheral assets but it could also led to increased demand for core assets which may counter investor demand for CHF vs. the EUR.
Either way, a continuation of Europe-centric political concerns likely underpins the JPY’s relative attraction as a safe haven. This view is underpinned by our bearish view on China and the perception that the yen will continue to find support this year from concerns regarding the broader impact of slowing growth in the world’s second largest economy.
It is possible that ECB Draghi will leverage the softer tone of the EUR but underpinning his dovish position at the March 10 policy meeting. EUR/JPY has already dropped by 5.8% percent so far this year. We see scope for further downside towards the EUR/JPY 122 area.”
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