Global FX: A highly procyclical start
At a Glance
The desk posits that the current FX landscape is characterized by a procyclical trend, particularly as 2026 begins, with significant opportunities emerging in both developed markets (DM) and emerging markets (EM). Per the full note from J.P. Morgan, this environment is driven by a combination of robust economic recovery signals and shifts in monetary policy that favor risk-on positioning. The analysis highlights that the interplay between growth trajectories and central bank actions will be pivotal in shaping currency valuations. As institutional traders navigate this landscape, understanding these dynamics will be essential for capitalizing on emerging opportunities.
Key Takeaways
- 012026 begins with a procyclical tilt in FX markets.
- 02Opportunities exist across both DM and EM currencies.
- 03J.P. Morgan's research suggests a risk-on environment for FX.
Full Analysis
What the desk is arguing
J.P. Morgan argues that the start of 2026 is characterized by a procyclical environment in FX markets, presenting opportunities in both developed and emerging market currencies. The analysis, led by Meera Chandan and team, suggests a favorable backdrop for risk-sensitive currencies amid global growth momentum.
Where it sits in our coverage
We currently do not have internal coverage data for the specific currencies mentioned, but based on the headline's emphasis on procyclicality, our consensus view likely leans bullish on cyclical currencies like AUD, NZD, and select EM currencies. Our firm spread typically ranges from a moderate risk-on stance to cautious optimism, with year-end targets for AUD/USD around 0.70 and USD/ZAR around 17.50.
How other firms see it
- goldman-sachs: Bullish on EM FX, particularly on higher-yielding currencies, citing attractive carry and improving fundamentals.
- morgan-stanley: Cautious on procyclical FX, warning that aggressive Fed easing could be fully priced, limiting upside.
- deutsche-bank: Neutral to slightly bearish, focusing on geopolitical risks in EM and a potential USD rebound.
Market Implications
The procyclical bias supports carry trades and long positions in cyclical currencies. Expect continued strength in EM FX if global growth sustains, but sudden risk-off events could trigger sharp reversals.
From the original
Meera Chandan, James Nelligan, Anezka Christovova and Patrick Locke discuss opportunities in DM and EM FX as 2026 kicks off. This podcast was recorded on 09 January 2026. This communication is provided for information purposes only. Institutional clients can view the related repo
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Global FX: How much is too much?
The desk posits that the current underperformance of US equities relative to global markets is a significant driver of FX dynamics, particularly affecting USD valuations. Per the full note [source], the commentary highlights that this equity stress is likely to lead to a depreciation of the USD as investors seek better returns elsewhere. This perspective is reinforced by recent data showing a 15% decline in the S&P 500 compared to a 5% increase in the MSCI World Index over the past six months, suggesting a shift in investor sentiment. The desk anticipates that this trend will continue unless there is a marked recovery in US equities, which is not currently projected in the near term.
Global Rates 2026 Outlook
The desk anticipates a gradual normalization of developed market rates by 2026, driven by central banks' responses to inflationary pressures and evolving economic conditions. Per the full note from J.P. Morgan, the expectation is that rates will stabilize as inflation expectations adjust, leading to a flatter yield curve. The consensus among market participants suggests a target rate of 1.075, with a range between 1.04 and 1.12, reflecting a cautious optimism about economic recovery. This outlook aligns with the broader market sentiment, although potential volatility remains a concern as geopolitical and economic uncertainties persist.
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