FX Daily Strategy: N America, September 26th

Risk positive tone may be overdone, downside risks on US data

JPY consequently has scope for recovery on the crosses

SNB cuts rates as expected but CHF initially rises

Thursday sees US durable goods orders data for August, revised Q2 GDP data and the latest jobless claims numbers. There hasn’t been a lot of significant data since the FOMC meeting, but the market has taken the view that a Fed willing to cut rates means the risks of a hard landing are low, so the equity market has moved steadily higher, with the S&P 500 making new all time highs. The nominal equity risk premium (equity earnings yield minus bond yield) has also fallen, with both equities and 10 year bond yields moving higher since the FOMC. While this has not reached the lows seen earlier in the year before the decline in bond yields and the equity sell off in the summer, it remains at very low levels historically. This still seems hard to justify in a slowing US economy where growth is expected to be sub-trend (unemployment is expected to rise). So the market seems optimistically priced, and consequently vulnerable to any weaker data.

The risks do seem to be on the downside for the US numbers. We expect only a marginal downward revision to 2.9% in the third (final) estimate of Q2 GDP from the second (preliminary) estimate of 3.0%. However, the data will include historical revisions for the last five years, and they should be closely watched. We expect August durable orders to fall by 2.0% overall as aircraft return to more normal levels after an extremely weak June was followed by a strong July. Ex transport we expect a second straight 0.2% decline, which would imply some loss of underlying momentum. Both of these are slightly below consensus, and there is also an upside risk to initial claims after an unexpected dip last week. This suggests some downside risk for the risk sensitive currency pairs – primarily the JPY crosses, which have seen a long period of gains over the last couple of weeks. GBP/JPY, for instance, saw its eighth consecutive day of gains on Wednesday.

The SNB has cut rates the expected 25bps to 1.0%, and maintained a dovish stance, cutting their forecasts for 2025 and 2026 inflation to 0.6% and 0.7% respectively (from 1.1% and 1.0%). They also said further cuts in rates may become necessary in the coming quarters to ensure price stability over the medium term. Given the dovish tone of the statement and the forecasts, the decline in EUR/CHF on the announcement looks like a “sell on the news” reaction rather than an indication that the market sees the statement as hawkish or in any way CHF supportive. It might be argued that the indication that rate cuts might be necessary in the coming quarters suggests no more than one cut a quarter, but less than that is priced into the market anyway. However, there is very little medium term correlation between movements in the CHF and interest rate spreads, so SNB policy is of limited relevance. EUR/CHF will tend to gain on a more risk positive take on European developments rather than movements in yield spreads. As long as the globally risk positive tone we have seen since the Fed rate cut is sustained, we would favour EUR/CHF gains, but there is a risk of a dip if market sentiment deteriorates or European data shows weakness.