FX Daily Strategy: Asia, February 8th

US claims data could trigger USD correction

BoE speeches may suggest scope for GBP declines

CHF risks on the downside

In a quiet week for data there may be more attention on the US jobless claims numbers, especially given the strong employment report and the rise in both the initial and continuing claims numbers in the last two weeks. Further increases could point to a much weaker February employment report, and undermine the bullish USD tone seen since the January report was released. Even numbers holding at last week’s level would suggest a weaker employment report in February, so the risks on the data look to be to the USD downside.

In the UK we have a face off between the arch MPC hawk (Mann) and the arch-dove (Dhingra), who are both due to make speeches. Megan Greene, one of the hawks from the December meeting, voted for no change in February, so the direction of travel favours the doves even though the MPC statement remained wary of looking for too much easing. Whether this can be maintained in the face of a decline in headline inflation below 2% y/y, which we see as being likely in the spring, is more doubtful. As it stands, the market is pricing 3 UK rate cuts this year with a probable June start and an outside chance of a cut in May. This is still quite a lot less than is priced for the Fed or the ECB, in spite of continuing weakness in UK growth data and what is likely to be a very sharp decline in UK inflation in the coming months. This is to some extent justified by a tight UK labour market due to weak UK labour supply, but we still see significant downside risks for the pound as the market starts to price BoE policy to dovetail more closely with the ECB and/or the Fed.

Wednesday was a very quiet day for FX, but there was some upside progress for EUR/CHF, and we suspect that the CHF has further to fall against a range of currencies. The strength of the CHF against the European currencies has to some extent been justified by the relatively low level of Swiss inflation, so that in real terms the Swiss franc has not been quite as strong as it appears in nominal terms. Even so, The real trade-weighted index is as strong as it has been since 2015, and the SNB seems to have recognised the need to curb CHF strength by halting FX selling. Reserves rose in December for the first time since 2022. While the CHF may have got some support from the geopolitical uncertainty in the Middle East, the combination of inflation elsewhere moving back to Swiss levels and an SNB opposing CHF strength should put the CHF on the back foot as long as there is no significant rise in global risk premia. If risk premia do rise we see much better value in the JPY than the CHF.