Swiss Franc Fallout Helps Send Yen Climbing Against Euro, Dollar

(Bloomberg) — The yen touched a three-month high against the euro after the Swiss National Bank roiled markets with its decision to abandon the franc’s cap, knocking down what an official earlier this week reaffirmed as a pillar of policy.

Japan’s currency was set for its biggest weekly gain since the shared currency’s 1999 debut, after the euro tumbled as much as 1.9 percent against the dollar on Thursday. The franc surged as much as 38 percent versus the greenback and gained against all of the more than 150 currencies tracked by Bloomberg. Volatility jumped to a more than one-year high. The SNB’s move to further lower rates that were already below zero boosted demand for higher-yielding U.S. debt.

“The Swiss decision has pushed U.S. yields lower and that’s pushing dollar-yen down gradually,” said Naohiro Nomoto, an associate for currency trading at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Many central banks are doing their own thing and that’s feeding uncertainties and will probably lead to risk aversion in markets such as stocks.”

The yen rose as much as 0.3 percent to 134.71 per euro, the strongest since Oct. 16 before trading little changed at 135.01 as of 9:27 a.m. in Tokyo. It gained for a sixth day on Thursday, the longest rally since September 2012. Japan’s currency was little changed at 116.22 per dollar after reaching a one-month high of 115.90. The euro weakened 0.2 percent to $1.1614.

The franc dropped 1.7 percent to 99.24 centimes per euro from yesterday, when it jumped as much as 41 percent to 85.17 centimes, the strongest since 1999. The Swiss currency fell 1.8 percent against the greenback to 85.46 centimes. It gained 21 percent to 83.92 centimes in New York after touching 74.06 centimes, the strongest since August 2011.

JPMorgan Chase & Co.’s index of global currency volatility rose to 11.24 percent yesterday, the highest since June 2013, up from last year’s low of 5.28 percent.

Global Markets

“This passive intervention in euro-Swiss was costly and not effective because for every euro the SNB was taking away, the European Central Bank stood ready to print another three,” Hans Redeker, London-based head of global currency strategy at Morgan Stanley, said in a conference call. “What today’s Swiss franc move did provide us, we think, is an opportunity of very cheap U.S. dollars, to buy the dollar cheap.”

Yesterday’s SNB decision roiled markets around the world. U.S. 10-year Treasuries rallied, pushing yields down as much as 16 basis points, or 0.16 percentage point, to 1.7 percent. The yield on German two-year notes dropped to a record minus 0.154 percent.

Some of the biggest losers in the currency market this year rebounded, as the SNB’s surprise forces investors to liquidate positions.

‘Got Burned’

“A lot of investors got burned so now they’re closing some positions that they were having some profits — we’re seeing that in Canada, in Aussie, in kiwi,” said Charles St-Arnaud, London-based senior economist at Nomura Securities International Inc. “Most investors are taking a step back to reassess their willingness to take risks now. That’s why you see very little liquidity in the market.”

The Canadian dollar rose as much as 1.2 percent yesterday before erasing gains. It traded little changed at C$1.1964 per dollar in Tokyo. New Zealand’s dollar gained 0.1 percent to 78.33 U.S. cents, adding to a 1.4 percent advance yesterday. The Australian held a 0.8 percent rally from Thursday.

These carry trades will continue to unwind in the coming days, giving support to funding currencies such as the yen and the euro, according to BNP Paribas SA. The Japanese currency rallied 1 percent today to 116.17 against the dollar, a fifth day of gains.

Euro Crosses

“Thursday’s massive appreciation of the franc will have hurt these trades badly,” the bank said in a report. “We may see depreciation pressure on higher yielding currencies and appreciation pressure on the other funders, including the EUR and JPY, as these carry structures are unwound in the days ahead.”

The change comes just one week before ECB policy makers meet to discuss introducing new stimulus on Jan. 22, including quantitative easing, a move that may add to pressure on the franc against the euro.

“The decision has been a surprise for markets — you can’t do it in any other way,” SNB President Jordan told reporters in Zurich yesterday. “We came to conclusion that it’s not a sustainable policy.”

The SNB imposed its limit on the exchange rate as an exodus from euro assets during the region’s debt crisis in 2011 strengthened the franc and raised the prospect of deflation. As well as removing the measure, the SNB also said yesterday it will push the interest rate on sight deposits to minus 0.75 percent from minus 0.25 percent.

In an interview with Swiss broadcaster RTS on Jan. 13, SNB Vice President Jean-Pierre Danthine said central bank officials were “convinced that the cap on the franc must remain the pillar of our monetary policy.”

–With assistance from Lukanyo Mnyanda in Edinburgh, Edith Balazs in Budapest, Piotr Skolimowski and Maciej Onoszko in Warsaw, Rachel Evans in New York and Chikako Mogi in Tokyo.

To contact the reporters on this story: Andrea Wong in New York at [e-mail]; Kevin Buckland in Tokyo at [e-mail] To contact the editors responsible for this story: Garfield Reynolds at [e-mail] Naoto Hosoda