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Bond Outlook January 31st

Is the future of the CHF linked to the JPY’s and possible unwinding of the carry trade? For those expecting curve steeping in Euroland, new CMSs are available. But beware!

Bond Outlook [by bridport & cie, January 31st 2007]

The CHF and the JPY have continued their downward trend. It seems that the lower the JPY goes, the louder the warning voices about unwinding the carry-trade. In the meantime, BoJ has given up on its desire to raise rates in the immediate future, thus encouraging the carry-trade even more. Nevertheless, the carry-trade scene remains a threat to the smooth rebalancing of the world economy.

We link the CHF to the JPY in this context. Last week we suggested why the CHF was losing its privileges as a low-interest but strong currency. Maybe it will become a sort of "euro in disguise", but its present weakness cannot fully be explained by the EUR replacing neighbours' weak currencies. We would go so far as to say that the franc is suffering from being a "yen in disguise", but which we mean that the JPY is taking the CHF down with it, and, when the process reverses, the two currencies will rise together, precisely because of the unwinding of the carry trade.

On USD interest rates, the debate goes on between those who see the Fed being forced to lower rates (the view promulgated by Pimco based on summing the nominal GDP and inflation), and others, including ourselves, who see the next Fed move as up.

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