Turmoil in Russia and emerging markets is leading to a “safe haven” demand for U.S. dollars. Historically, the Japanese yen and the Swiss franc have also been safe haven currencies, but this is not the case today:
The main support for the Japanese yen during times of risk aversion came from the behavior of domestic investors. The recycling of the current account surplus stops and foreign assets get repatriated, which work to push the yen higher. At the moment, Japan is no longer running a current account surplus and the public pension fund is aggressively buying overseas assets. Also, the BoJ has tended to respond slowly during crises. The BoJ is currently in the midst of an aggressive expansion of its balance sheet.
Switzerland has been viewed as a safe haven for hundreds of years. The country may continue to attract capital inflows, but it won’t translate into a stronger currency. The SNB remains steadfast in its commitment to prevent EUR/CHF from trading below 1.20. Indeed, the central bank introduced a negative deposit rate this week and stands ready to undertake FX intervention in potentially unlimited amounts.
Bottom Line: The U.S. dollar looks invincible. The Fed is intent on raising interest rates next year and there are no safe haven competitors. We are long the dollar against sterling, the Japanese yen and a basket of regional Asian currencies. The euro poses the greatest risk to the dollar bullish consensus. As highlighted in previous Insights, a €1 trillion expansion in the ECB’s balance sheet is already discounted and the technicals are very one-sided.