Global FX: Bearish USD vs. EM FX risk appetite index, G10 cyclicals and the Fed
At a Glance
The desk is positioning for a bearish outlook on the USD, particularly against emerging market currencies and G10 cyclicals, as macro signals indicate a procyclical environment while technical indicators suggest caution. Per the full note from J.P. Morgan, the USD/CNY has recently breached the 7.0 level, reflecting a shift in risk appetite that could favor EM currencies. This sentiment aligns with a broader expectation of a dovish Fed, which is likely to influence USD dynamics in the near term.
Key Takeaways
- 01Macro signals strongly favor risk currencies, but technicals suggest caution, creating a tactical dilemma.
- 02USD/CNY breaking below 7.0 is a key milestone reinforcing EM FX strength.
- 03Scandinavian currencies are breaking higher, reflecting broad G10 cyclical outperformance.
- 04The Fed's policy path is the critical variable that could tip the balance between macro and technical factors.
Full Analysis
What the desk is arguing
J.P. Morgan's FX podcast debates the tension between highly procyclical macro signals and increasingly cautious technical signals. The break of USD/CNY below 7.0 and the rally in Scandinavian currencies underscore broader EM FX strength and G10 cyclical outperformance. The desk suggests that macro momentum may be sufficient to overcome technical headwinds, but the Fed's policy stance remains a critical wildcard.
The supporting evidence centers on the sustained procyclical macro environment, with strong global growth and risk appetite fueling EM FX gains. J.P. Morgan notes that macro signals have historically been the primary driver of medium-term FX trends, implying that the current bullish bias for risk currencies is likely to persist. However, technical indicators have turned cautious, suggesting potential exhaustion in the short term.
Implicitly, the desk rejects the notion that technical caution alone can reverse the macro-driven trend. They argue that unless the Fed surprises with a hawkish pivot, the path of least resistance remains lower USD and higher EM FX, with Scandis as a proxy for G10 cyclical strength.
Market Implications
The debate implies that near-term USD weakness may be capped by technical resistance, but a sustained macro-driven trend could reassert after consolidation. EM FX, especially currencies like CNY, and G10 cyclicals like Scandis may continue to outperform if macro signals prevail. The Fed's January FOMC meeting will be key: a dovish hold would reinforce the procyclical narrative, while any hawkish surprise could trigger a sharp USD rebound and risk-off move.
From the original
Macro signals are highly procyclical but technical signals turn cautious – we debate what matters more. Plus USD/CNY breaks 7.0, Scandis break higher, spotlight on the Fed. Speakers Meera Chandan Global FX Strategy, Arindam Sandilya Global FX Strategy, Anezka Christovova Head of
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