The combination of improving domestic fundamentals, heightened rate hike expectations, and external pressures supports a near-term bullish outlook for the JPY, particularly against non-USD pairs. On the other hand, in the absence of major geopolitical or political disruptions, the CHF is likely to remain under pressure, driven by subdued inflation, the SNB's dovish stance, and the central bank’s clear preference for avoiding a strong franc.

CHF: Remain bearish

The release of Switzerland's December inflation data has further confirmed the intensifying disinflationary pressures in the country, strengthening expectations of additional monetary easing by the Swiss National Bank (SNB) at its March meeting. December’s headline CPI fell to 0.6% y/y (from 0.7%), while core CPI declined to 0.7% y/y (from 0.9%), both missing forecasts. This persistent softness in inflation has solidified market expectations for a 25bps rate cut in March, with some analysts not ruling out further cuts later in the year. Notably, the SNB’s Q4 inflation forecast of 0.7% was already revised lower in December, and the actual Q4 average of 0.63% fell short, adding weight to the case for policy easing.

The December 50bps rate cut has already positioned the CHF as a funding currency. While potential threats such as U.S. tariffs on Europe and weak Eurozone growth could provide some CHF strength, particularly in EUR/CHF, these are outweighed by Switzerland's low inflation environment and the SNB’s accommodative stance. JPMorgan, meanwhile, prefers short CHF/JPY positions over USD/CHF and EUR/CHF, but contingent on stronger yen catalysts, such as more hawkish signals from the Bank of Japan or robust Japanese economic data (Indeed, we had last week, read the JPY’s bullet below).

Looking ahead, the CHF calendar is light, with no significant market-moving events on the horizon. In the absence of major geopolitical or political disruptions, the CHF is likely to remain under pressure, driven by subdued inflation, the SNB's dovish stance, and the central bank’s clear preference for avoiding a strong franc.

JPY: January rate hike is coin flip

The latest economic data released in Japan recently was increasing the expectations of a possible rate hike by the BoJ. As a reminder, during the December meeting, Governor Ueda recently reaffirmed the BoJ’s readiness to raise rates if the economy continues to improve, emphasizing the need for balanced wage and inflation growth. Indeed, the labor market data is particularly encouraging, with nominal cash earnings growth reaching 3.0% y/y in November, boosted by higher minimum wages and bonuses. The BoJ’s preferred same-sample earnings metric showed an even stronger 3.5% y/y increase. Inflation-adjusted real earnings, while still negative, have improved, indicating progress in wage-driven inflation. Services PPI, a key measure of underlying inflation, reached a record high of 3.2%, further reinforcing the BoJ’s inflation goals. These developments suggest the BoJ may raise rates twice in 2025, potentially taking the policy rate to 0.75%.

In addition, BoJ said to be mulling the rate decision for January, according to Bloomberg sources; mulls upgrading core-core inflation forecasts for FY24 and FY25; said to be mulling raising inflation forecast amid JPY; no decision made on raising rates and intends to wait until the very last moment before deciding on increasing rates. As a result, the market pricing for January rate hike is around 50%-50% currently.

However, external risks could temper JPY gains, particularly uncertainties surrounding Trump's potential trade policies and their impact on global trade dynamics. Markets are also cautious about the Fed’s slower pace of rate cuts, which adds upside pressure to USD/JPY. Despite these factors, ING and Credit Agricole highlight the risk of FX intervention if USD/JPY approaches the 150-160 range, creating a ceiling for further weakness in the yen.

Looking ahead, the JPY calendar is relatively quiet, with no significant market-moving releases on the horizon. Consequently, yen movements are likely to remain influenced by the rate differential between JPY and USD, as well as potential verbal interventions from Japanese authorities if USD/JPY continues to rise sharply. Overall, the combination of improving domestic fundamentals, heightened rate hike expectations, and external pressures supports a near-term bullish outlook for the JPY, particularly against non-USD pairs.