Global FX: 2H Vol Outlook: Carry the Day, Vol the Tail

Hi, I'm László Jenkowik with Global FX Strategy, and I'm glad to have here with me Arindam Sandilya, co-head of Global FX Strategy, and my colleague on the derivatives team, Sanjana Shinde. We just published our FX derivatives mid-year outlook and want to go over some of the key views in this short podcast. So I'll start with a little bit of intro.

So in the first half, we've had pretty turbulent start, all picked up in January. We've seen it spike in early March, and then we had a pretty solid roll down to the lowest in the post-COVID period where we are right now. So in the second half, considering that the economy background still looks pretty solid, we are starting from quite depressed vol levels.

In fact, we are estimating it's about two sigma to lowest global business cycle. On the other hand, really, we are not seeing some major catalysts. So we don't expect regime change, more of the just drift higher after we pass this usually softer summer for the volatility.

Now, I would like to switch to the teams that we covered in the outlook, and the first team would be on the carry. And now, considering that I was just talking about the grind a little bit higher in the vols, we still think it's really the environment where carry remains pretty supported and well expressed through the options. And one thing we look at from that point is carry to all ratios, which looks still very favorable.

A couple of things that we are focusing on in that domain, dollar, honky, essentially carry to vol in that case is the highest among all that we watch typically. Bottom on low yielding crosses like euro, Swiss yen also look very favorable for expressing options. And then within the G10, sterling, Swiss, again, setup is pretty favorable for limited topside exposure in the options.

Now, one thing which we usually like to resort for the vol carry would be kind of selling vol. That's a little bit challenging. And the alternative is really on the skew premium harvesting.

Again, a couple of pockets that seem interesting to us, they're half czar, max. They all have either fairly wide pricing on the skew or there is quite a bit of underperformance, meaning options markets are kind of overstating how much you can realize in the skew. So basically on spot vol correlation.

So that's, again, like something that we are watching pretty closely. One caveat here is the hawkish feds that makes us a little bit wary of expressing to the dollar. And we basically prefer to do it on the crosses.

So things like euro, max, skew premium looks too high to us and essentially is something that is worth watching. Now switching to some of the other teams, you've taken a close look at the directional expressions in options and also the dollar skew, which is probably getting even more interesting now after Vorshun Wednesday. Do you want to give us some highlights on those two teams?

Yeah, thanks for that. So some of the directional expressions that we have looked at do have a bit of an overlap with the carry team that you just discussed. But that is the nature of the world we live in, where macro views generally are aligned in this really slash carry direction.

So I'll just mention maybe two or three things that's top of mind for us going into the second half. One is, you know, as our regular listeners know, we are bullish of dollars. We made that shift about a month back.

We particularly like owning dollars against low yielding currencies. And I think this sort of theme expresses itself really well by options where premiums are quite low. The thesis itself is fairly self-evident, I would think, after the June FOMC earlier this week.

And maybe listeners can tune into our sister FX podcast for a more detailed discussion of the macro views for the second half. But when we screen for dollar calls across the entire G10 and EM universe, nowhere do we find option premiums to be as depressed in a currency where our macro team also shares the directional view embedded in those options as dollar yen. So dollar calls, yen puts, or dollar yen call digitals are pretty well priced in a historical sense.

Similarly, we also like the idea of dollar Swiss going higher. And along very similar lines to dollar yen, we like gearing up those views via these correlation structures where one simultaneously bets on a dollar pair going up, such as cable going down, and sterling Swiss simultaneously rallying. So that's a bullish dollar sleeve of ideas.

And I think we're just going to cycle through different currencies as the year rolls on. But essentially, this is going to be a fairly doable part of the portfolio mix. The second thing we're looking at in a more carry-oriented relative value sense are EM trades, particularly within the EMEA block, where our EM analysts seem to have the most conviction in expressing asset currency views.

So within that universe, half of the universal favorite. And this is one of the best carry trades going around. It's not a new trade.

But when we look at the euro half vol surface, we find that deep out of the money, like 10 delta type strikes on the euro half put part of this vol skew has absolutely collapsed because macro investors have heavily piled into option structures such as euro half put spreads and digitals and variants thereof. So because those low delta puts are quite cheap involved, we think that the risk reversals in euro half are still quite high. And there is value to be had in expressing bullish half via those risk reversals.

We also like the idea of intra-European RV, where one can fund upside in a positive carry currency like half, which obviously has solid fundamentals going in its favor with a low yield like Sweden, which we have light funding out of for a long stretch this year. And the option pricing slash RV element of this is that the spreads can be put on without much or any premium outlay depending on strikes chosen. And then finally, I think when we hunt for non-dollar expressions within the RV universe, another idea that looks plausible to us is relative value within commodity FX.

There's been a fair bit of divergence in commodity FX returns this year as cyclical conditions have been somewhat different in different places. So based on where current option prices are, based on where our end of year spot forecasts are, we find that premium neutral expressions of owning RAND and Norway financed with New Zealand dollar make quite a bit of sense to us and is historically very well priced. The last thing I'll say is you asked me about SKUs or risk reversals.

Within the dollar G10 space, they have not at all performed for most of 1 inch 26 barring a small stretch when the Iran war erupted for obvious reasons. But now that the Fed has turned hawkish and the dollar could be in for a reasonable move higher in the second half, we are quite cautious around extending that trend over the next six months. I think if macro demand for dollar calls comes through to chase the spot move higher, as is usually the case, and given that spot vol correlations in most dollar pairs have already formed and are running above where option prices are implying those metrics, then one should be really using dollar SKUs defensively.

And one relatively easy place to do that, in our view, is dollar CNH. Given how low vol and riskies are on the surface, and given how consensus the trade is, given how stretched the rates versus FX relationship looks to us, I think just overlaying risk reversals on cash positions is a fairly straightforward, prudent proposition. And in our screening, we also find that dollar Swiss risk reversals are heavily performing in the direction of dollar calls.

So again, a fairly decent place to set up bullish dollar exposure in options. Thanks, Arindam. So at this point, I would like to switch a little bit gears and go in the direction of the next theme that we discussed in the outlook, dollar correlations.

So dollar correlations being firm and performing for almost like uninterrupted couple of years, and we do see them continue to perform in second half of this year as well. Implied course at 60 are a little bit of a challenge, so it's kind of a little bit hard to trade them directly. But a couple of things that we've been doing from that point is then focusing on the underperformance in the cross-core space, which is kind of goes hand in hand with the dollar correlations remaining firm.

And one pocket which seems interesting from that point is, for example, sterling cross-course. Things like sterling stock, sterling dollar looks decently vulnerable at this stage from the point that realized correlations are essentially clocking about 30 points, 35 points below their price. So in a way, it's a pocket which then looks interesting for utilizing those underperforming cross-correlations in a way that we would like to have the exposure on the dollar course.

One thing I would keep in mind there is just the UK political calendar. So at this stage, these kind of sterling-based expressions do need to be a little bit focused more on the near-term type of the horizon. The other stuff that's almost corollary of the firm-dollar correlation is the essentially performance of the dollar voles versus the cross voles.

So being bullish, things like Kiwi dollar voles, which tend to provide quite enough game does make sense to us. And then financing it with the underperforming leg of the voles, which in this case, things like Euro Kiwi, basically focusing on the cross voles. And we've seen those type of vole RVs perform pretty well in late 2020, 2021, 2022 hiking cycle.

And we expect then that considering that the hawkish stance from quite a few of the central banks and Fed since Wednesday, that we could see exactly the same type of scenario and these bullish dollar voles versus the underperforming cross voles again reemerge. Now with this cross-core team, I would like to switch to Sanjana. She covered some quite interesting stuff on the being a little bit on the defensive side and that goes pretty well with the carry that I discussed earlier.

And then finally, it does seem like we have a bit of a busy Ventris calendar in the second half. So if Sanjana could tell us a little bit about those two last two teams that we covered in that book. Hey, lad.

Yeah, thanks. So as we're moving past this Iran shock and there's more of a quieter catalyst window, we're seeing the key point is that the low vole regime is already quite stretched. So the markets aren't pricing that much risk, which provides for a cheaper entry for us to defensively hedge if the voles do pick up, like you mentioned, due to maybe more of a mean reversion or because there's more of a macro event going forward.

For this, our framework leans towards owning volatility in a bit more of a patient way, knowing that summer seasonality is going to lead to lower voles until they pick back up into autumn. So for currency selection, then, we're leveraging our Vega model and what stands out there are higher beta FX, especially those tied to global growth and tech, while at the same time, traditional safe havens are behaving a bit more asymmetrically. Now Dollar Korea and INR were both flagged as top five candidates, but we think that the entry point is pretty suboptimal there, considering their curves are already inverted in the front end and also they're overall elevated on the back of the recent realized volatility moves.

Dollar Stocky and Dollar ZAR, on the other hand, are offering cleaner upside to a vol normalization, considering they have a favorable pricing to roll down trade-off, and ZAR screens a tad bit better than Stocky, just based on its higher beta to commodity exposure and global trade dynamics. Plus, it has a cheaper entry, which is similar to its 2014 levels, and its realized voles are performing, and if it remains sticky, implies it could catch up. Alongside that, SKU has also reached pretty elevated levels, specifically for subsidized gamma structures to perform.

So this would allow some exposure to potential realized pickups without having to pay for that full carry, by going long the front end at the money gamma, and then selling richer, longer dated SKUs. In this section, we're going to be more bullish Euro Stocky and Dollar ZAR, with a strong front end carry, favorable curve rolls, and marginal SKU richness. If you time the Stocky accurately here, you can also allow for some gamma risk to bleed in with Sweden's general election on September 13th.

Now moving on to your second question, lad, for the event risk, we do have a pretty stock 2026 second half for the calendar. So we're starting with Brazil. This one's more of a cleaner, more defined catalyst.

So the election in October is going to follow the standard two round structure, and historically, that does create some uncertainty around whether a first round majority is achievable, which is why in 2022, we saw a strong forward ball pickup. What we're seeing in this 2026 cycle now is that forward balls are actually along the same election ball paths, it's just slightly earlier. So if you look back at the polling, often the first round of certainty has been overstated, and then it's tightened more into that second round, which is why the dynamic tends to push realized vols a lot higher than what was initially priced.

So a more competitive race does remain the key upside risk here for vols. And we're pricing spot break evens at around 3% for both rounds. In the UK now, the setup is a bit more gradual.

The Labour Party leadership is seeing some challenge. And if you look at historicals, these events do tend to generate two to four vols throughout the entire duration of the political process, so a bit more longer timeframe, but then they see a quick drawdown in vols right after. Where this could get interesting is if we see a combination of this leadership challenge tied in with the budget in November.

Some of the new candidates for the Labour Party leader are associated with higher borrowing and taxation. And overall, that could drive potentially higher guilt yields and then a larger vol response in the FX side. The third event that we have is the USMCA, and that risk is a bit more binary.

So the base case is that negotiations don't cleanly resolve by the deadline of July 1st, so in around two weeks from now, and instead extend more into bilateral negotiation. But the distribution here is asymmetric, considering trade tensions between the US and Canada could produce sharper moves and then allow for MEX to outperform CAD. So the focus here is really more on tail risk rather than just more closer to add the money.

And then lastly, you have your US midterms. Historically, these haven't been a major FX vol driver, and that's because the policy levers that really matter for FX tend to especially sit within the executive rather than the Congress for the US. You could see some impact here through fiscal signaling by the president if a reconciliation package is introduced prior to the election, but that channel looks especially constrained right now, given relations with the legislative branch.

So overall, midterms are more of a background risk, whereas events like Brazil and the UK dynamics are more direct drivers for the FX vol in the second half of the year. Thanks, Vlad. Yeah, thanks very much, Arindam.

Thanks very much, Sanjana. Pretty interesting. Yeah, so this concludes our FX derivatives midyear outlook podcast.

We have more details in the published note. We appreciate your interest and hope you find it helpful. Thanks very much and have a great rest of the day.

This communication is provided for information purposes only. Please refer to JPMorgan Research report related to its content for more information, including important disclosures. 2026 JPMorgan Chase & Company All Rights Reserved. This episode was recorded on June 18, 2026.