FX Daily Strategy: Asia, Sep 3

Still quite a challenging environment developing which could play out a number of different ways over different timeframes amid some potentially unstable correlations. Upward pressure on yields is still being driven more by the real yield mark up for many and for others (such as UK gilts) in sympathy and reflecting the global real yield competition.

Much of how this plays out bigger picture is where the ‘uncle point’ sits and just how much of the real yield mark up ultimately proved sustainable and digestible by the broader market. Near-term the danger is that risk markets have to at least have a corrective wobble before they then calibrate whether they can live with the higher yields for a longer period. Or, whether any such wobble does enough to short circuit and speed check the bond selloff and rate expectations in turn.

During this initial market orientation and digestion phase, the initial impetus has been to focus on squeezing ‘both sides’ of the FX spectrum – shifting shorter/lighter CHF on the one side as the last of the low yielders, and seeming some so far measured risk-counter trimming on the other.

In terms of CHF, we discussed this some time back - CHF/JPY and the carry question (here). While that took a bit of post intervention breather, rotation does seem to be evident again on the cross’ move back towards the break area and fresh sellback. As the BoJ gives even stronger hints out of G20 that a hike and ‘nimble’ action is likely at the next meeting, the underlying driving shifts have picked up more momentum. CHF really does stand out as the last of the current ZIRPs, while the yen surfaced first some covering into weakness, and some momentum now on the turn around. 

This has also seen expression in EUR/CHF, up at one-year highs – overbought on the move of course but if it sticks then eventually the trend and high break could bring in the much higher levels up at 0.96~.

On the flip side is the risk trim, and the equivalent example here would be EUR/SEK. Overbought also but 11.1700 weekly high of late-August 2025 is the next area. Just higher is congestion around 11.2000.

Meanwhile, we still see sterling falling down the market’s pecking order, both given the BoE remains the rate hike laggard of the majors, but also because of its risk sensitivity.

Gilt yields are being driven up by global dynamics rather than local but nonetheless to levels where fiscal binds again become a more prominent UK concern, not the easiest backdrop for the new PM.

1.3475 Fib is close below on cable now though as elsewhere the move is oversold on the short-term charts (.25 is the next lower projection).

Turning to Thursday, Swiss CPI is seen remaining a low outlier at just 0.5%y/y, reinforcing some of the dynamics discussed above.

The UK and EZ have their final PMIs, while Eurozone PPI is seen at 5.3%y/y from 4.6%, still reflecting basic pipeline pressures.

In the US we expect the trade deficit to rise to $90.5bn from $73.3bn in June. Fed’s Waller and Hammack are also scheduled to speak.