It was a particularly busy year for the Bank of Japan and Swiss National Bank as they both took action to keep their currencies from rising, albeit using different strategies. In today’s edition of Piponomics, we take a look at the top stories and themes that rocked the Japanese yen and Swiss franc in 2012.
Same problems, different year
The year 2012 was more like “2011 version 2.0” for Japan – it pretty much faced the same economic threats this year. Arguably, it had it even worse this year. Deflation was just as stubborn a problem as ever, as the monthly core CPI posted negative figures seven times this year. And domestic demand was far from stellar, as evidenced by the Bank of Japan’s efforts to spur economic activity in the homeland.
Meanwhile, Japan’s export industry began 2012 with an ominous outlook for trade, and boy did it live up to expectations. The yen’s persistent strength, along with an overall weaker global demand, dealt Japan’s exports a bad hand, which kept Japan on its longest streak of deficits since 1980.
Overall, we can’t say that 2012 (a year that saw credit rating agency Fitch downgrade Japan’s economy from AA- to A+) was a good year for the Land of the Rising Sun.
Japanese yen still a slave to risk sentiment
Risk sentiment remained the key market driver for the yen, far more than fundamentals.
As usual, risk aversion was still a bane for the Bank of Japan (BOJ), as it often led to gains for the safe haven currency. In Q2, for instance, when the world was drunk on euro zone concerns, the yen was one of the strongest currencies around.
On the other hand, periods of risk-taking usually caused the yen to weaken and ease off its highs, just as we saw when global fears began to die down in the latter part of the year.
Stimulus, stimulus, and more stimulus
The BOJ got busy this year, rolling out trillions and trillions of yen in stimulus. It began easing on Valentine’s day and proceeded to do so four times more. By doing so, it had hoped to hit two birds with one stone: combat low growth in the homeland, while dampening demand for the stubbornly strong yen. And with Shinzo Abe (a very vocal supporter of aggressive easing) re-elected as Prime Minister, it looks like we’ll get even more stimulus going forward.
Change of leaders
We’re used to having central bankers shake up the markets, but certainly not in this way! The top story surrounding Switzerland and the Swiss franc at the start of the year was Philipp Hildebrand‘s resignation as Swiss National Bank (SNB) Chairman.
Hildebrand was accused of using the SNB’s currency intervention for personal gains after his wife had sold around 400,000 CHF. The move came just weeks before the SNB set the minimum exchange rate on EUR/CHF at 1.2000 back in September 2011. Naturally, the scandal raised serious questions about insider trading among policymakers and stoked doubts about the SNB’s transparency. In response, Hildebrand decided to step down as the central bank head, giving his seat to Thomas Jordan.
What followed next was a period that saw the Swiss franc gain ground, as traders were uncertain whether the SNB would be able to defend the EUR/CHF floor at 1.2000 with Jordan at the helm.
SNB defends its peg and turns EUR/CHF into a ghost town
In the following months, we witnessed the markets put the SNB’s patience to the test as they kept attacking the 1.2000 handle. But true to its word, the SNB held its ground and defended 1.2000 grittily.
On a few occasions, the market popped up sharply on speculation that the SNB would raise the floor on EUR/CHF. However, these rallies were quickly snuffed and EUR/CHF completely retraced its footsteps after the SNB stuck to its guns.
With the SNB on guard, EUR/CHF was not surprisingly a virtual ghost town from April to August. The pair traded in an extremely tight range and saw very little movement except for the aforementioned occasional rumor-triggered spikes.
Pressure on EUR/CHF eases
Towards the end of the year, downward pressure on EUR/CHF began to ease as risk appetite slowly made its comeback. This, coupled with the fact that the euro zone finally made headway in resolving some of its problems (like taking steps towards establishing a banking union and granting Greece its second bailout payment), allowed EUR/CHF to slowly drift away from the 1.2000 floor.