FX Daily Strategy: N America, December 7th

USD can edge higher into the US employment numbers

EUR remains vulnerable with Q3 GDP likely to be revised lower

Claims the main US data

JPY retains upside potential, particularly against the CHF

Thursday sees the release of largely second tier data and the market will be primarily focused on adjusting positions in anticipation of the US employment report on Friday. We have seen a fairly substantial decline in US yields in the last month, with the 10 year yield down around 50bps since the October employment report, while the 2 year yields has lost around 30bps over the period. Some of this has been fundamentally driven by soft inflation data, but some also likely reflects end of year unwinding of short bond positions. After such a large move in the last month, it will take clearly weak data to push US yields much lower, particularly at the long end, given the still very inverted curve against the background of an economy that continues to record solid growth. We consequently see some scope for a USD recovery into the employment report correcting some of the USD decline since the November report.

We continue to see the most scope for USD gains as being against the EUR, with short term yields spreads pointing towards a move to 1.07. For Thursday, we have seen weak German industrial production data and a downward revision in Q3 Eurozone GDP data to -0.1%, both of which should put downward pressure on the EUR. The EUR has so far been resilient, largely because of the focus on the JPY, which has surged sharply higher, but we would not expect EUR resilience to last.

The US has the usual Thursday jobless claims numbers, with continuing claims nowadays more of a focus than initial claims due to the recent uptrend, but his is not the employment survey week so the implications of the release are less likely to have an impact ahead of Friday's employment report.

From an FX perspective, we still see the JPY as having the most scope to gain against the USD. This is supported by yield spreads, but with the USD potentially seeing a recovery into the end of the week, the JPY may have more scope on the crosses. CHF/JPY is the clearest value play, as Swiss 10 year yields are now below Japanese yields, and CHF/JPY is only a couple of figures below all time highs, having risne 50% in the last 4 years. It is hard to see a rationale for such a big valuation change, especially with the SNB likely to confirm that rates have peaked at next week's meeting and Swiss inflation data heading lower more rapidly than expected.