The trading week ended as it began, with investors selling the dollar and seeking the safety of the yen and Swiss franc.
This time, rather than North Korea, investors have been unnerved by Hurricane Irma – a potentially deadly storm, likely to reach Florida on Saturday evening, that is expected to cause significant economic damage.
Irma’s current maximum wind speed, as measured by an Air Force Hurricane Hunter aircraft, is 155mph (240kph) according to Weather.com – more than enough to break trees in half and tear roofs from buildings.
“[It’s] way bigger than Andrew,” said Florida Governor Rick Scott on Friday evening.
When Hurricane Andrew hit Florida in 1992, it was, at the time, the most destructive storm in US history, with damage valued at USD 25 billion – equivalent to USD 44 billion in 2017 terms.
Ahead of Irma’s arrival, investors once again sold the dollar and piled into the yen on Friday, forcing USD/JPY through 108. The pair reached 107.32 around lunchtime in London, marking the yen’s highest valuation in 9 ½ months and taking its year-to-date gain against the dollar to 9%.
Having finally broken the dominant support level at 108-108.15, Japan’s currency is unsurprisingly set to strengthen further against the dollar according to both Credit Suisse and Nomura Holdings. Both banks said on Friday that they see USD/JPY reaching 105 in the medium term (105.40 for Credit Suisse).
Like the yen, the Swiss franc is considered a safe haven in times of uncertainty. It had joined the yen in gapping higher on Monday morning following Sunday’s test of a hydrogen bomb by North Korea, and it did so again on Friday when, like the yen, it broke upwards into new territory. USD/CHF’s fall on Friday to 0.9421 marked a 2-year high in franc buying power.
The Swiss franc remains vulnerable, however, against the dollar in the short term, according to Forex.com’s Fawad Razaqzada.
“With sentiment being so bearish on the dollar, I can’t help but think we could see a nasty short squeeze rally in the coming days or weeks. Any sudden improvement in data could see investors pile back into the oversold dollar…especially against currencies where the central bank is still dovish. A good example is the Swiss franc with the Swiss National Bank still charging negative interest rates,” said Razaqzada.
The analyst added that “USD/CHF therefore could be among the first dollar pairs to show potential strength when the dollar starts its comeback.”
Readers should note that, although not explicitly mentioned, Razaqzada’s rationale is also applicable to USD/JPY, to a lesser extent, since interest rates in Japan are also negative and the Bank of Japan has so far refrained from signalling a cutback to its massive bond-buying program. Rates in Switzerland are, however, considerably lower than in Japan (-0.75% versus -0.1%) and among all the world’s central banks, the Swiss National Bank is considered least likely to tighten monetary policy in the near future.
Consider, for example, that a reader in Switzerland could make an overseas payment today of JPY 5,000,000 and pay only CHF 44,065 with BER’s best value FX provider. Compare that with today’s Bureau de Change average of CHF 47,232 and note the saving of more than CHF 3,000!
Author: Joel Wright
Joel has been involved in the markets for the past 10 years. During that time he’s worked in market analysis teams in London, in the financial technology sector in Singapore – working mostly with automated trading tools and algorithms – and most recently he’s been planning FX risk hedging for an SME in Bangkok. Joel has a first-class honours degree in Financial Services and currently writes about foreign exchange for several global businesses.
You can get in touch with Joel via email here or via the contact page.