JPY, GBP and CHF outlook

USD/JPY blipped above 79.00 in the wake of a report in the Japanese press that states that the Bank of Japan (BoJ) is considering more easing measures at its board meeting on October 30 in order to achieve their 1% inflation goal. Higher US bond yields in the wake of the better than expected US data releases this week are also acting to support USD/JPY.

Given that Japan has effectively been less aggressive than other central bank yet has a fairly ambitious inflation goal, pressure for more aggressive BoJ action should not be surprising. However, in the past the BoJ has underwhelmed and unless US yields continue to push higher, USD/JPY may end up back in its recent ranges. USDJPY 79.23 is a strong initial barrier for the currency pair to cross to establish any move higher.

GBP/USD has edged higher since hitting a low just under 1.60 late last week benefitting in large part from general USD weakness. This is unsurprising given the strong correlation between GBP/USD and the index. However, the true reading of GBP is evident on the crosses and here the picture is far less positive. GBP has lost ground against the EUR and looks set to weaken further.

GBP losses may be limited to around 0.8198 given that interest rate differentials have turned more GBP positive recently. UK retail sales and public finances data today will give further direction and although a bounce back is likely in September sales any positive impact on GBP is likely to be short lived as the currency continues to be restrained by expectations of more BoE QE.

The expectations of a request for Spanish aid and ensuing European Central Bank (ECB) action has managed to alleviate inflows into CHF assets, helping the SNB’s task of protecting its 1.2000 line in the sand for EUR/CHF. Consequently FX reserves growth is likely to slow which in turn will reduce diversification flows from the SNB into other currencies. My forecasts continue to show both EUR/CHF and USD/CHF moving higher by year end.

However, in the short term USD/CHF will edge lower amid general pressure on the USD. Upcoming data releases including trade data today will help give some indication as to whether the SNB’s policy stance is having a positive economic impact. The sharp drop in the CHF nominal effective exchange rate since the implementation of the CHF ceiling will help but there are still many domestic companies calling for a weaker currency.

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