Global Macro Updates: UK recession, CHF LPPL Signal, JPY Pain Trade

There are a few notable outliers we see across the global macro trading opportunity set at present:

• UK recession risks are elevated, suggesting UK yields are biased lower
• The CHF rally is very stretched on breadth indicators and has recently triggered an LPPL exhaustion signal
• Japanese pensions have stopped selling foreign bonds, removing a key catalyst for JPY strength, driving a pain trade in weaker JPY (poor carry + unwind of long speculative futures positioning)

See our Top Global Macro Ideas for a summary of current and historical ideas.

UK recession risks suggest yields are too high

It remains striking that UK yields across the curve are still at elevated levels comparable to the US despite much worse economic data.

UK payrolls are contracting YoY, while jobless claims and company insolvencies are rising.

We have previously flagged the poor housing outlook implied by the RICS surveys, including pulling forward of housing activity in 1Q2025 to get ahead of Stamp Duty tax rises. The CBI growth composite and service sector employment indicators also remain at very low levels.

UK inflationary pressures have likely peaked. The ONS hospitality price survey has rolled over meaningfully.

UK real 5y5y OIS remains very high at +1.6%.

It remains good risk reward to retain a bias towards lower UK yields and curve steepeners.

CHF LPPL Signal => Long CAD vs Short CHF

We have seen an LPPL exhaustion trigger on USDCHF, suggesting the CHF rally is running out of steam. 

CHF breadth has been very strong (measured by the cumulative advance-decline line) and is at contrarian levels from which the CHF has depreciated previously (left chart). Consensus expectations for a stronger CHF and lower Swiss inflation have been a good contrarian indicator for a weaker CHF historically (right chart). 

It remains politically challenging for the SNB to intervene directly in FX markets and Switzerland is back on the US Treasury's monitoring list for currency manipulation. However they could take policy rates negative again or increase the charge on CHF sight deposits to lean against CHF strength.

We prefer playing this CHF LPPL signal by going long CAD vs short CHF, instead of the USD. From a positioning point of view, CHF speculative futures shorts remain extreme vs the USD, but CAD is also at a comparable level of speculative shorts vs the USD.

The Bank of Canada is much further into its easing cycle than the Fed, reducing the risk of unanticipated Canadian rate cuts that would weigh on the CAD.

Canadian recession risks are already well known, given small business delinquencies have already been elevated for the past year. Crucially the delinquency rate has stabilized and not deteriorated further.

We think the risk is for upside growth surprises in Canada. Our Canadian growth leading indicator has been steadily rising, while building permits and construction starts have been resilient.

Long CAD vs short CHF is at an attractive level.

JPY Pain Trade

Japanese pension funds have stopped selling foreign bonds and turned buyer in both May and June. This removes the key catalyst needed to drive a stronger JPY.

Speculative futures positioning still shows very long positioning in JPY, while quarter-to-date the JPY's negative carry has been driving the pain trade for a weaker JPY.

We stop out of our short GBPJPY. We still believe in the UK recession thesis, but now move to express that via lower UK yields.