FX Daily Strategy: Asia, February 7th

EUR/USD to watch German production but could settle into a range

JPY strength starting to show on the crosses – CHF/JPY the barometer

NOK/SEK has potential to break above parity

There isn’t a great deal on Wednesday’s calendar that looks likely to move markets, but there may be more attention than usual on the German industrial production data after the very strong rise in the orders data on Tuesday. Orders are a lot more volatile than production, so it is unlikely we will see anything like the rise in production that we saw in the orders numbers. However, there is now some evidence in the orders numbers of a slight improvement in the trend, while the production data have shown a steady deterioration in recent months. The surveyed market consensus forecast of a 0.4% m/m decline in December would suggest only a very slight improvement in the underlying trend, and after the orders data might be seen as something of a disappointment. However, with US yields edging lower on Tuesday EUR/USD looks like stabilising in the 1.07-1.08 range for now, although technicals still suggest downside risks. 

The JPY performed better through Tuesday as yields fell back in the US and Europe following the post-employment report surge. We continue to see CHF/JPY as the best barometer of the JPY’s long term fortunes, as this should be nearly a pure value play, with little spread between Swiss and Japanese yields, and similar risk characteristics between the CHF and JPY. The JPY has fallen more than 50 % in the last 4 years, and while this move was initially supported by a move in yield spreads, the spread move has now nearly completely reversed. CHF/JPY has been trading a narrow 169.50-171.50 range for the past month and was pressing the lower end on Tuesday. Longer term, there should be scope for a full retracement back to around 120, so a break below the recent range could be a trigger for a longer term move.

We do get the Riksbank monetary policy minutes on Wednesday, and we continue to look for a trigger for NOK/SEK to break back up above parity in line with the yield spread moves we have seen in the last month. The relationship with yield spreads has been strong and consistent over the years, so this looks like a move that will happen. However, EUR/NOK looks more out of line with spreads than EUR/SEK, so it may have to happen from the NOK side.