Synopsis:

RBC highlights short CHF/JPY as a preferred trade due to the current market dynamics, including a potential disconnect in USD/JPY positioning and anticipated central bank actions. The firm expects continued favorable conditions for this trade, driven by differing central bank policies and valuation considerations.

Key Points:

• Market Dynamics and Positioning:

  • USD/JPY Unwind: The unwind in USD/JPY positioning has been notable but remains uncertain. Data on lifers’ semi-annual hedge ratios, expected later this month, will likely show these ratios at historically low levels.
  • Speculative Flow: Speculative flow has rebounded, leading to a disconnect in USD positioning versus JPY compared to other G10 currencies, including CHF.

• Central Bank Policies:

  • Swiss National Bank (SNB): The SNB is anticipated to cut rates again this month to 1%, with further cuts expected in December and next year. Both headline and core inflation in Switzerland are low, reinforcing the SNB's need to manage currency strength to avoid further deflation.
  • Relative Central Bank Stances: The divergence in central bank policies between Switzerland and Japan contributes to the attractiveness of short CHF/JPY.

• Valuation and Technicals:

  • Valuations: RBC sees short CHF/JPY as advantageous given the current valuation metrics and the anticipated central bank actions.
  • Technical Outlook: The bearish technical outlook for USD/CHF has been accurate, supporting the view that CHF/JPY remains a strong trade choice.

Conclusion:

RBC's preference for short CHF/JPY is underpinned by the current positioning, central bank policy expectations, and valuation factors. This trade is seen as favorable due to the ongoing divergence in central bank actions and market dynamics.