Goldman, BofA Favor Swiss Franc Over Yen as Political Risk Grows

Goldman Sachs Group Inc. and Bank of America Corp. strategists are backing the Swiss Franc over the yen, with rising political uncertainty undermining the appeal of the Japanese currency as a safe-haven asset.

“Long CHF/JPY may be the cleanest trade to express JPY‘s fiscal risk given CHF‘s healthy fiscal profile and increasing risk premium for USD and JPY, the traditional safe haven currencies,” Bank of America’s chief Japan FX and rates strategist Shusuke Yamada wrote in a note Monday. The bank recommends going long the Swiss franc against the yen, with a target of 189.

The view is echoed by Goldman strategists including Michael Cahill , who said that “fresh political uncertainty in Japan should be supportive for CHF and, to a lesser extent, EUR,” as both currencies stand to benefit from US growth worries and sequential Federal Reserve rate cuts.

The yen, already the worst performing G-10 currency over the past three months, has come under additional pressure after Prime Minister Shigeru Ishiba said he would resign, which has opened the door to favoring looser fiscal policy. Diverging central bank paths are also supporting the currency pair, which hit a fresh record high this week. The Bank of Japan’s policy normalization is clouded by political uncertainty, while the appears to have reached its rate floor amid a in inflation.

The Swiss franc has been favored by some investors in recent years thanks to Switzerland’s strong macro fundamentals. Japan’s negative real yields stand in contrast to Switzerland’s mildly positive ones, and while the Asian nation has a sizable current-account, the surplus is largely driven by investment income that’s often reinvested abroad. Its trade balance, in contrast, has mostly been in deficit since 2011, while Switzerland’s trade surplus has been expanding.

The shift toward the franc over the yen has also been visible in official flows. Global foreign-exchange reserve managers have increased allocations to the Swiss currency, with its share of global reserves rising to 0.76% as of March 31, the highest since 1992, according to a Bloomberg analysis of International Monetary Fund data. While still well below the yen’s 5.15% share, the trend suggests growing traction for the franc in reserve portfolios.