FX Daily Strategy: N America, December 8th

USD may get mild boost from US employment report

EUR and CHF the most vulnerable to USD recovery

JPY strength is overdue and can extend

CHF/JPY is the most clearly overvalued JPY cross

The US employment report will naturally be the main focus on Friday. We expect a 200k increase in November's non-farm payroll, stronger than October's 150k though excluding the impact of returning strikers the data will be consistent with a modest slowing. We do however expect a correction lower in the unemployment rate to 3.8% from 3.9% and a 0.3% rise in average hourly earnings, stronger than October's 0.2%. All of this is slightly on the strong side of market expectations, except the earnings forecast, which is in line with consensus. But even a modest beat might be enough to trigger a recovery in US yields, given the sharp decline over the last month. The USD could be expected to benefit from any bounce in yields, although we continue to see scope for USD gains as greater against the EUR and CHF than other G10 currencies.

The big story over the last couple of days has been the sharp recovery in the JPY, triggered by comments from BoJ governor Ueda. Even though Ueda made it clear that the BoJ were not planning an imminent exit from their ultra easy monetary policy, he did indicate that such an exit was likely in 2024 and started to discuss the potential shape of the policy change. This was enough to boost JGB yields, and remind the market that BoJ policy is on a different cycle to policy elsewhere. While yields elsewhere are likely to decline through 2024, at least at the short end, JGB yields are likely to rise. In any case, we were starting from a position where the JPY already looked significantly cheap relative to yield spreads against most major currencies.

USD/JPY and CAD/JPY have been the most closely correlated with yield spreads over the past couple of years, and the recent decline in US and Canadian yields still suggests scope for the JPY to gain another 2% or more. On top of this, there is potential for the JPY to recover further than suggested by nominal yield spreads as the real value of the JPY has declined by around 20% more than the nominal value over the last few years. If we see a bounce in US yields on the back of the employment report, USD/JPY is likely to bounce as well in the short run, but now that he JPY's downtrend has broken, we see scope for JPY gains on the crosses to continue even if we see a pause in USD/JPY losses.

There isn't a great deal on the calendar ahead of the US employment report, suggesting a relatively quiet European morning ahead of the release. It was notable on Thursday that EUR/CHF reversed some of the weakness seen in the last couple of weeks. The CHF would normally be expected to be correlated with moves in the JPY, as both are seen as alternative safe havens to the USD. But the two have had very different trajectories in the last few years, with the CHF seeing big nominal gains while the JPY has seen big nominal losses (and very bigger real losses). At one point this may have been justified by the rise in Swiss yields, but the 10 year Switzerland/Japan yield spread has now fallen back to zero. If we are seeing a re-pricing of the JPY, the clearest valuation anomaly is against the CHF, after a 50% gain in CHF/JPY in the last four years.