Synopsis:

Morgan Stanley maintains a bullish skew on the JPY due to policy convergence and reduced carry trade incentives, while turning bearish on the CHF due to deflation risks and the Swiss National Bank's (SNB) intervention stance.

Key Points:

JPY Tactical View:

• Neutral Bias | Bullish Skew
  • Supportive Factors:
    • Policy convergence trends continue to favor the JPY.
    • High volatility stemming from the US policy agenda limits further carry trade flows into JPY crosses.
  • Outlook: The currency is likely to strengthen as monetary divergence narrows between the BoJ and its G10 peers.

CHF Tactical View:

• Bearish Bias | Bearish Skew
  • Key Drivers:
    • Soft inflationary pressures raise concerns about deflation in Switzerland.
    • The SNB remains committed to preventing excessive CHF appreciation.
  • Outlook: Expect further CHF weakness as the SNB intervenes if deflation risks escalate or if CHF strength becomes too pronounced.

Conclusion:

Morgan Stanley sees JPY benefiting from narrowing policy divergence and reduced carry trade appeal, while expecting CHF to face headwinds from deflation concerns and SNB's currency management. Investors may consider positioning accordingly as these dynamics play out.