Swiss private investors are underinvested in foreign assets as they have refrained from foreign portfolio investment since 2016 and pension funds hold high FX hedge ratios on their bond and equity portfolios. If CHF is no longer strengthening, the incentive to roll on their hedges is lower, suggesting less CHF buying. As Eurozone breakup risks remain low and the ECB is embarking on a path of gradual policy normalization while the SNB remains accommodative, there is a higher incentive for Swiss private investors to invest abroad in search of yield, weakening the CHF. The sight deposits data also suggests that the SNB has resumed its FX interventions recently after EURCHF fell to the 1.15 level, limiting the CHF upside. This is not often said with JPY, but this is a positive carry trade. The risk to this trade is the SNB changing its reaction function.

CHF SNB Not Changing Yet Bearish
Watch: Sight Deposits, SNB Rates Decision
We maintain our bearish bias for CHF. The SNB rates decision is the main risk event in the coming week, where we do not expect them to change their accommodative stance given uncertainty over the impending vote on the sovereign money initiative in June, inflation still below 1%, and the growth recovery just starting. This should drive Swiss investment abroad in search for yield, especially as Eurozone breakup risks remain low. Based on the sight deposits data, the SNB has returned to intervene in the FX markets when EURCHF was hovering around the 1.15 level, limiting the upside for CHF.

JPY in Risk Rebound Neutral
Watch: BoJ Rates Decision, Labor Cash Earnings , PPI, Weekly Security Flows, IP
In the short term, we think there is scope for USDJPY to rebound to 108 as risk appetite rebounds with the US 10y real yield coming down from its recent high of 82bp. Despite recent protectionist rhetoric, we think China wants to maintain strong global growth to support internal rebalancing and the lower USDCNY lends support to this view. As trade tensions ease, global fundamentals remain in place, and earnings perform well, we see JPY under temporary selling pressure. In the long term, we remain bullish on JPY as we expect risk appetite to soften in 2H18.

Credit to Morgan Stanley Research
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