Let’s start our 2010 review with one of the strongest majors as of late:
Swiss franc regains status as safe-haven currency
The combination of less-than-stellar economic data from the U.S. and mounting euro zone debt troubles helped the Swiss franc regain its safe-haven status. This led to a massive franc rally across the board, more notably against both the dollar and the euro.
SNB hints at ending currency interventions
The biggest economic, and probably the only event of strong influence was the SNB’s interest rate decision in June. The SNB dropped its commitment to launch currency interventions and prevent the appreciation of their currency. The SNB also highlighted the country’s improving fundamentals. As a result, franc buying intensified further, and took USD/CHF to parity and EUR/CHF to new all-time lows.
Japan’s struggle with deflation
Early in the year, I gave you 4 reasons why the Japanese economy sucked. One of the reasons, deflation, is still a nagging problem and from the looks of things, will continue to be a problem for the near future. While deflation does not directly affect the yen, it does play a major factor into how the Bank of Japan will handle monetary policy.
Political uncertainties fuel safe-haven rally
From Hatoyama’s resignation, to the tug-boat incident, to Kan’s victory in the mid-year election, Japanese politics kept hitting the headlines. Still, all the political uncertainty didn’t stop the yen from rising across the board. Once the news died down, the yen resumed its steady downtrend.
Yen outpaces U.S. dollar as safe-haven currency?
The yen reveled in its role as a safe-haven currency when the U.S. dollar took kept taking hits across the board. With traders unwinding their positions in higher yielding currencies, the yen benefitted, even against the dollar. From a high at 94.73, USD/JPY dropped a good 1,400 pips, and tested major support at the 80.00 price level. That’s a 14% slide down the chart!
The BOJ’s failed interventions
The persistent rise of the yen presented big problems for the Japanese economy. With a big portion of their economy riding on the shoulders of its export industry, a strong yen made Japanese companies less competitive on a global landscape. In order to counter this, the BOJ launched currency interventions via a combination of different methods.
In the end, all of this didn’t work, as USD/JPY was tested 15-year lows just below 80.00. This just goes to show that without a coordinated effort, currency intervention is very difficult to pull off.