– CHF vulnerable after US data and ahead of the SNB
USD rallied across the board following the stronger than expected 236 k gains in US NFP print, from a downwardly revised 119k gain in the previous month. The unemployment rate dropped from 7.9% to 7.7%, the lowest level since December 2008. The report is clearly an encouraging sign for the US economy but in our view not a game-changer for the Fed. The drop in the unemployment rate was entirely due to lower participation rate, while the median duration of unemployment increased. Arguably, this is not the quality of the labor market improvement that the FOMC are looking for. Thus, we believe that the emphatic reaction in the rates and FX markets is probably overdone. We would still place this report within the ‘Goldilocks’ scenario where the US economy is moving in the right direction but not at a pace that would trigger the end to accommodative Fed policy. Markets are likely to look with optimism to this week’s retail sales report but we expect the core reading to fall by 0.3% m/m. We believe the outlook for the US economy warrants a differentiated view for the USD – we see a recovery in commodity currencies (see below) but weakness in the low yielders such as JPY and CHF. For the latter expect the SNB to reaffirm the commitment to the 1.20 floor at the policy announcement on Thursday. We believe CHF will be one of the weakest currencies this year as euro zone stress remains contained and CHF safe haven positions unwind further (see chart). We maintain a long EURCHF trade recommendation, targeting 1.28.
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BNP Paribas