Global FX: Broader impacts from the dollar bid

Welcome to the J.P. Morgan At Any Rate podcast, where we'll just discuss the latest macro themes and views in FX. I'm James Nelligan in London.

I'm here with Arindam Sandilya out of Singapore, our global co-head of FX Strategy, and Junya Tanase in Tokyo, who runs our Yen FX Strategy. So an interesting week in markets, some kind of consolidation in yields after the aggressive move higher that we've seen in, say, 10-year U.S. yields over the past month. DXY, though, still kind of hovering near the highs as we speak anyway.

Yesterday, some quite soft PMI data out of Europe. I think that just speaks to the shift in our call on the dollar last week in terms of the growth impact in some of the energy importers outside the U.S. and the shift that we had on the call in the dollar last week to more of a bullish view as a result of that. Some layer of uncertainty, though, still, I think, just hovering over the market in terms of prospects of a U.S.-Iran deal and how that might weigh on the dollar over the short term.

But that probably just keeps any kind of dollar move a bit more contained. I think it keeps positioning a bit lighter as well across the investor base. But we're starting to think, and we have thought for the last few weeks now, that some of these kind of growth and inflation dynamics that we're seeing come through look like they're happening kind of despite the war, despite the conflict.

You look at things like hyperscaler capex plowing on in the U.S., some of the inflation that we're seeing spill over into core measures beyond the impact of the war, that's just making the dollar call a little bit more asymmetric in our view. In terms of my space in Europe, I would say I'm quite impressed with the continued run in Nokia, the Norwegian krona, despite oil prices not making new highs. I think that's just testament a little bit to the fact that there is more to the bullish Nokia case than in terms of trade.

You do have rate spreads moving in the currency's favor. Nor does bank remaining hawkish in our view. We think they do hike in September.

And they carry friendly environment generating inflows. And I think it's an interesting dynamic. In my view, I think we're in the kind of world here where you don't really necessarily need rate spreads to be moving in a currency's favor in order for it to appreciate.

If the level of carry is already high, then that itself can generate inflows. And I think that's a similar dynamic to what we've seen with yen before, where rate spreads haven't necessarily moved, but the yen's weakened in previous years. For sterling, we've had a bunch of soft data this week, kind of putting an end to the run of upside data surprises for the UK.

So labor market, CPI, PMI, and retail sales all came in on the soft side. But trade weighted sterling is actually up on the week. And I think that speaks to that carry environment that we were talking about.

Some of the political lull in terms of headline risk from UK politics, the market has still got a while to wait before the Makefield vote on June 18. And that just allows carry to dominate a little bit. And positioning itself, we do see the investor base quite short sterling now.

And Burnham has climbed down a little bit in terms of playing down the change in fiscal rules. It just gives the market a little bit less to play with in terms of political risk for the moment. And I think you can see that in certain measures of risk premium.

So if you look at the UK asset swap at the long end, that's been moving higher, which I think is just a little bit of a sign of less fiscal risk premium in the UK. So we might yet see better levels in sterling to start to think about bearish political outcomes. I think you have to wait a little bit for that, certainly in my view.

Anyway, turning to Asia, Arindam, let's bring yourself into the conversation. It looks like there's been a bit of a step change or a delta change in sentiment around Aussie of late. What do you make of that?

Also, CNH has been trading reasonably well in the face of recent dollar strength. Can that last? And is there any read across from the CMY settlement data we got from SAFE?

Hey, James. Yeah, you're right that there's a bit of a sentiment shift on the Aussie that's in the making. I hear more clients in conversation starting to nibble on bearish Aussie positions.

The RBA obviously having broken ranks with other DMs and banks in terms of proving more hawkish in the last six, seven months, it's looking like it's shifting to a more balanced outlook. We got the RBN minutes this week. It seems like the board has now done enough to have created space for itself to wait and observe the effect of the hikes in the Australian economy.

The OIS market, I think, is still priced for a share more than one hike. But I think that's kind of natural given the flow of incoming inflation data that is likely over the next quarter or so. But Benjamin and Tim and Sidney think that the RBA's hiking cycle is essentially over.

And that view got more data support this week also in the form of a two-tenths downside surprise to the unemployment rate in the April jobs report. And I think Ben flags that there's some technical quirks to the data that could pay back next month. But net-net, I think it's fair to say that the evolution of our Aussie view is that at least the RBA rate spread support for the currency seems to have run its course or is approaching its end, even though the other pillars of the bullish Aussie construct in terms of rate differentials, energy terms of trade, and superfund FX hedging supports are still kind of intact.

So at the margin, we still constructed Aussie versus energy casualty, low yielding in terms of trade currency such as the euro. But on a forecast basis, we're not really looking for Aussie dollar itself to stretch much beyond 73 cents or so on the other side of the mid-year. And then on CNY, as you said, all eyes this week were on the CNY fixings after the conclusion of the US-China presidential summit last week.

Now, there was some angst among some market participants at least that you could get a bit of a sell-the-fact reversal in the fixing downtrend now that a big political event was out of the way, even though, and I must stress this, in recent years around Trumpship meetings, this has not only not been the trend, but has actually been followed by between 2% to 5% of CNY appreciation in the three months after such summits. But in the event, the good news is that the fixings have not misbehaved at all. They've trended lower all week.

We broke below 684 the figure. So that leaves us still constructive on the RMB here. We're looking for a spot to get down to somewhere in the 670, 675 zone in coming months.

But I think there's no denying that markets are getting frustrated with this low pace of appreciation, with spots seemingly stalling around 680 or so. Now, there's also some hand-wringing around the fact that the April settlement data that you mentioned that we got early in the week did not sustain the well-above seasonal dollar-selling norms of Q1, i.e., Chinese exporters are not coming out in ports in the way that they did earlier in the year to offload unconverted dollars. And B, I think people are also mindful that the Chinese dividend season starts sometime in late June, early July.

And as we've seen with most of Asia, dividend outflows do seem to have some sort of a drag on the currency. But right here, right now, there's not a whole lot to like in Asian FX. The dividend season is still about a month or a little bit more away, and the FX are not misbehaving.

So right here, right now, we're still constructing on the same line. Okay, thanks. Thanks for that, Arindam.

Makes sense. Just turning to the Yen now. Junya, we've got dollar-yen approaching 160 again here.

What's the intervention outlook seeming like to you here in terms of risks and the incessant rise in long-end JGB yields? How does that factor in? Thank you for the question, James.

So as a conclusion, I think that if the Yen approaches 160 again or exceeded, it is likely that next round of intervention will be conducted. The estimated size of interventions conducted from April 30 to May 6 is about 8 to 9 trillion Yen in total. This is comparable to 2022 intervention, but there is still room up to 15 trillion Yen in 2024.

Depending on the development going forward, it is possible that the total size of intervention at the current episode will exceed that in 2024. In the previous intervention, MOF did not try to push the Yen down far below 155, but this may have been intended to save the ammunition in preparation for the scenario in which the next round of intervention becomes necessary in the near future. Regarding the possible constraint on the intervention, if we consider the redemption of securities held as FX reserves, the portion that can be used for financing intervention without any outright sales of U.S. treasury is much larger than that is generally sold.

And IMF free floating criteria are not expected to be a strong constraint as well. On the other hand, Japanese authorities likely have a want to avoid significantly reducing FX reserves and being seen as having diminished intervention capacity. Given that, we believe that at some point they will be forced to give up trying to cap the Yen upside at around 160.

As a baseline, the currency like Yen, which is freely traded under the free floating currency regime, it is difficult for the intervention to stop or reverse the trend that is determined by fundamentals. In the 2022 and 2024 cases, the Yen fell significantly after the second series of interventions. But this was largely due to a broad dollar weakness, reflecting the changes in the outlook for U.S. economy and monetary policy.

As discussed in the previous currency views, as the macro environment has recently become more positive for the U.S. dollar, it is unlikely that the broad dollar weakness will lead to a large decline in the Yen in the coming months. Regarding about the rise in JGB yield, yes, it is true that the increase in JGB yield seen over the past several weeks has been notable, significant. However, to some extent, it has been in line with the global trend, and given the persistent domestic supply-demand concern, it may be premature to connect this directly to a fiscal story.

In fact, last November, when the JGB yield rose sharply on the back of fiscal concern due to the Takahashi administration's policy, a strong negative correlation between super long-end JGB yield and the Yen was observed. By contrast, the current correlation between JGB yield and the Yen is weak, even though it may be partly distorted by heightened concern over the potential intervention. However, as the relevant debate is expected to intensify going forward over the funding sources for consumption tax, tax cut, and growth strategies, it will be necessary to keep a close watch on the relationship between JGB yield and the Yen from here.

That's from me. Thank you. Great.

Thanks, Shunya. We'll leave it there this week. This communication is provided for information purposes only.

Please refer to J.P. Morgan Research Reports related to its content for more information, including important disclosures. 2026 J.P. Morgan Chase Company, all rights reserved.

This episode was recorded on May 22nd, 2026.