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Long CHFJPY has been our top strategic pick for 2020 premised on the substantial difference in the underlying balance of payments position between the two countries.
The bottom line is that Japan neutralises all of its current account surplus through outflows of long-term equity & FDI whereas Switzerland recycles only one-half in this manner (refer above chart).
In other words, Switzerland needs to generate substantially greater outflows of short-term capital than Japan. This not only biases CHF higher vs JPY on a trend basis, but also means that CHF could potentially hold its own versus JPY in risk-off environment. It’s fair to say that the thesis that CHF could prove more anti-cyclical than JPY has not yet been established (CHJFJPY has dipped a 1.5% in the last two weeks), so to be on the safe side we are buying JPY vs one of the most cyclical European currencies, SEK, to neutralise the possibility that we are could inadvertently find ourselves on the wrong side of a deeper shake-out in risk.
For now, therefore, while we are still short CHFJPY spot and are short CHF-JPY correlation through a dual AED, the net spot position now converts to long CHFSEK.
This off course is highly sensitive to growth and is well-placed to capitalise on a more substantive re- think of the regional and global economic outlook.
Sell SEKJPY at 11.268, stop at 11.493.
Long CHFJPY from 113.45 on Jan 14th. Marked at -0.83%.
Stay long a 2-month dual at-expiry digital (USDCHF < 0.9625 & USDJPY > 110.70). Bought at 10.5%. Marked at 2.52%. Courtesy: JPM
