The downside risk in CHF/JPY has become more evident. The cross rate failed to reclaim its February-July range of 198-204 and has fallen to 193, its lowest level since December. This leaves the door open for a further decline towards 186, around its 100-week moving average.
First, monetary policy divergence increasingly favours the JPY over the CHF. The market has a near-100% conviction that the Bank of Japan will hike by 25 bps to 1.25% at its September 18 meeting. The BOJ has signalled that if underlying inflation evolves in line with its forecasts, financial conditions remain sufficiently accommodative to accelerate policy normalization. US Treasury Secretary Scott Bessent also favoured BOJ rate hikes over repeated FX intervention to counter excessive JPY weakness and its contribution to cost-of-living pressures and rising US long-bond yields.
By contrast, the Swiss National Bank has zero incentive to raise its 0% policy rate at its September 24 meeting. Switzerland’s headline and core CPI inflation remain near the lower bound of the official 0-2% price stability range. Unlike many of its peers, the SNB is looking through the energy-driven rise in inflation. Keeping rates low reduces the CHF’s yield appeal while supporting domestic credit and employment.
Second, CHF/JPY faces asymmetric FX intervention risks. The late-July joint FX intervention demonstrated that Washington shared Tokyo’s urgency to arrest the JPY’s disorderly depreciation. This coordination also redirected investor scrutiny of the fiscal deficit and debt sustainability from Japanese Government Bonds to US Treasuries. Conversely, SNB has repeatedly signalled its readiness to counter excessive CHF appreciation that threatens Switzerland’s export-reliant manufacturing and pharmaceutical sectors.
The downside risk in EUR/JPY is less straightforward. First, the EUR and its anti-USD trade could remain supported by the USD debasement theme. Despite stronger-than-expected US nonfarm payrolls, expectations for a Fed hike at next week’s FOMC meeting have been tempered by US President Donald Trump and his administration publicly pressing the Fed to avoid a rate hike or even to lower rates. A softer-than-expected US CPI print this Friday could reinforce the pressure.
Second, strength in EUR/CHF and EUR/GBP provides a synthetic tailwind for the EUR from the European Central Bank’s relatively more hawkish stance compared to its Swiss and British counterparts. Markets are pricing in a 95-100% probability of rate hikes at both Thursday’s ECB meeting and next week’s BOJ meeting. However, JPY may gain the upper hand if the BOJ affirms an accelerated pace of normalization, pushing EUR/JPY below its psychological support at 180.
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