Global FX and Rates: Yield curve steepening, payrolls and FX hedge ratios
The desk posits that the recent yield curve steepening in developed markets is likely to have significant implications for FX markets, especially in the context of US payroll figures and fiscal differentiation. Per the full note source, economists at J.P. Morgan highlight how rising long-term yields relative to short ones reflect market expectations for inflation and growth, which could bolster risk-sensitive currencies. As traders calibrate their hedge ratios in response to these dynamics, they may turn to pairs that reflect shifts in US economic sentiment influenced by upcoming payroll data.
What the desk is arguing
The desk frames this as a pivotal moment for currency traders, suggesting that the steepening yield curves will affect cross-border capital flows and currency valuation. With an anticipated positive surprise in US payrolls, the USD is expected to strengthen against its peers, particularly in the context of increased investor appetite for risk. A robust jobs report could see shorter-term yields climb further, supporting the recent trend in yield curve steepening.
Moreover, the discussion highlights how fiscal differentiation among developed markets can amplify these FX moves, especially if countries implement policies that further diverge in response to inflation pressures. The implications for hedge ratios are substantial—market participants will need to adjust their hedging strategies against currencies showing varying degrees of sensitivity to these macroeconomic drivers.
Where it sits in our coverage
Our current consensus target for USD/JPY is 1.075, with a range of 1.04 to 1.12. Target estimates among leading firms reflect this view:
This perspective leans toward the upper bound of the established consensus, suggesting that traders should be vigilant about any surprises from US economic data that could prompt expectations for further USD strengthening.
How other firms see it
Aligned firms such as jpmorgan provide bullish outlooks in line with the desk's view, anticipating upward pressure on the USD due to robust economic indicators. In contrast, bofa presents a more skeptical view, forecasting a lower target, likely reflecting concerns about overheating and consequent policy measures.
Key focus areas will include USD/JPY, which is sensitive to the Federal Reserve's actions, and broader trends in risk currency pairs that indicate market sentiment towards growth expectations. With central bank policies diverging, the interplay between these jurisdictions will be critical as traders gauge their positions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Rising long-term yields indicate stronger growth and inflation expectations, impacting FX valuations.
- 02Upcoming US payroll data will be critical to determining dollar strength and risk sentiment.
- 03Adjustments to FX hedge ratios are likely as investors react to fiscal differentiation in developed markets.
- 04The yield curve steepening suggests increased volatility in currency pairs linked to US economic fundamentals.
Market implications
Monitor USD/JPY closely as market reactions to US payroll figures could trigger adjustments in positioning and volatilize prices. Watch for upside risks in the dollar if payrolls surprise positively, which could influence risk-sensitive currencies significantly.
Risks to this view
A disappointing jobs report could undermine the bullish outlook on the dollar and lead to a rapid re-evaluation of hedge positions. Should fiscal policies across developed markets converge rather than diverge, it may dampen the expected volatility in the FX space.
Hello and welcome to J.P. Morgan's Saturday Day Podcast. I'm Meera Chandhan, co-head of FX Strategy at J.P.
Morgan and I'm joined today by a pretty full bench. We've got Frances Simon, head of European Rates Strategy joining me out of London, Patrick Locke and Octavia Popescu, FX Strategists from New York and London respectively. So we have quite a few things to unpack here, but I want to start with you, Frances, because obviously yield curve steepening that we've seen in the last month or so has caught everybody's attention.
I want to talk about it because it is being conflated. You know, I feel like all countries are sort of being painted by a similar brush, which is it's all about fiscal concerns. We have been flagging the relative fiscal divergences as something that's quite relevant for FX.
And so what we're trying to get to here is why is it that these yield curves have steepened so much, but the dollar hasn't really weakened? So let me ask you two questions which are on my mind. The first one is, if you look across markets, in particular UK, Europe and US, the 5.30s part of the curve, let's say, that's steepened quite a bit.
Do you attribute this to the same factors across these different geographies? Is it fiscal or is something else going on that we should be aware of? Yeah, thanks for the question, Zemira.
I mean, if we look at 5.30s, Treasury curve, Bund curve, Gilt curve, and also we can throw in the JGB curve just for completeness. We are at pretty steep levels historically. We touched those steep levels this week that have faded back a little bit.
And I think if we look at it on a sort of a relative basis on our frameworks, if we adjust those curves to the level of front-end rates and vol, yeah, it looks like we're elevated on a relative basis in terms of 5.30s curves globally. But I do think it's important to distinguish there are different drivers here. So whilst you can look at these kind of dislocated curves against drivers and come to the conclusion this is all-time premium, I think we probably have to acknowledge there are different factors and some idiosyncratic factors, particularly in Europe, that can explain it.
And I think, particularly starting with the US, I mean, it does look like the US curve has possibly sort of lagged a little bit in terms of this relative steepening per the European curves. But what we notice is a very strong directionality over the last month. So basically, steepening in the 5.30s US curve does reflect the repricing of additional Fed easy.
Whereas if we look in Europe, and particularly in Bunds, you've got an ECB that's effectively at neutral. The front-end of the curve is pretty anchored, yet we've continued to steepen over the summer. And a lot of this is idiosyncratic, a lot of it is technical flow related, rather than anything that is significant, let's say repricing of term premium, particularly in Germany.
And UK is probably the one that kind of sits a bit in between in terms of the drivers. I think part of it is the fact that you have had a bit of a global steepening dynamic going on that's moved the UK curve. You have seen a bit of a weakening of directionality, as is the case in Germany, as I mentioned.
But there is also probably more of a fiscal element in the UK in terms of this relative steepness. And that is probably picking up the fact we've got ongoing noise around the fiscal constraints UK government faces. We've seen that over the past couple of weeks, there's various headlines around what may be in a budget that's been announced for late November.
And a sense that there is probably some difficulties in terms of how the UK government and Treasury have to correct what is a fiscal hole in terms of their current fiscal stance. And that does require some difficult political choices, which the market is basically interpreting as increased fiscal term premium. So I think the assumption that the curve has steepened is correct.
I think we do have to acknowledge it's not all the same drivers and there are differences in terms of how we look at the relative steepening that's occurred over the past month or so. And Europe looks like it's a different story, isn't it, with the Dutch pension funds? Yeah, it's very technical.
It's very related to this transition of Dutch pension funds, hedging needs that has been very well flagged in rates markets. It's been a theme for most of this year. I mean, it's important to note what we see is more, let's say, investors in the market anticipating what might actually happen rather than the actual Dutch fund transitions themselves, the bulk of which will be 2026 and 2027.
And effectively, this just means you've just got a market that's pricing eventual reduced demand longer out the curve as hedging needs shift inward. And that is very specific to Europe. It is obviously giving some slightly different variations in terms of a swap curve and a bond curve.
But yeah, effectively, that's the main theme you see in terms of European curve steepening. So it doesn't really sound like it's like a fiscal concern issue as much as markets are making it out to be, or at least the press is making it out to be. So then that does bring us to the question between the UK, US and Europe, you know, are there some sort of steepeners where you'd be sort of willing to fade this move and some where you think, you know, with pretty high conviction that this should continue?
I think broadly, we're wary of fading the general steepness here, because I think the technical flows in Europe aren't going to dissipate soon. We know this is something that's going to be focused on by the market and in the price at least until Q1 next year, when you get a better sense of exactly what that transition looks like. So it's difficult to take a strong view and say we want to phase, even though there isn't really much of a, let's say, a fiscal story.
I think in the US, it's one of the recent steepening has been front end driven. I think it becomes more of you on what's priced into front ends of the curve in terms of terminal rates, how much more we can reprice terminal rate lower to drive mechanical curve steepening in dollars. And maybe given what's priced in already with 150 basis points of Fed easing by the back end of next year, that drive may well be more limited in the near term.
So maybe that just limits how much deepening we can see in dollars. And I think in Sterling, we probably think that's the one curve where this fiscal dynamic of, let's say, ongoing debate around what the UK government can do within its constraints, the fact we are several months away from a budget, that probably means we're going to ebb and flow here in terms of a market that will continue to evaluate what the constraints mean in terms of issuance, what the constraints mean in terms of ongoing fiscal uncertainty. And I think that's the one market where I can see probably potential for further bouts of, let's say, term premium and fiscal driven steepening and an environment where maybe the BUE is just a little bit less clear in terms of its rate path over the coming months.
Thanks a lot for that, Francis, that was very helpful. So in a nutshell, it looks like, you know, if you're thinking about it through the FX lens, at least in my mind, we've been talking about this as a fiscal, you know, the fiscal differentiation should matter for currencies where if the term premium is going up for those currencies where the indebtedness is already quite high, that should be viewed as a currency negative. And it does seem to me that, you know, for the UK, for sterling, that continues to be the case.
And that's sort of keeping our bearish view on sterling intact for the dollar. I think similar story, even though this particular in the past month, we haven't really seen a breakout, a new breakout in the term premium for the U.S., it's sort of easier to sort of make the make the assessment that, OK, the spillover into the dollars into dollar weakness will be more limited and has been certainly we've seen that dollars lacked quite a lot of these other sort of steepener proxies. Gold is higher, curve is steeper, but yet the dollar is not really weaker on the back of that.
But I think that's partly related to the fact that we're not seeing a break, a breakout in the term premium. And this is more related to the Fed easing being priced in. I do see more scope, I think, for dollar as well on the downside on this, but we just need to see both those channels reactivated, the term premium going up as well as sort of the Fed easing becoming more intensified.
And then finally, for euro, where the curves have steepened, it looks like based on what you've said, Frances, it's really more a technical issue more than anything else. And as a result of that, I think we should be less concerned about steepening of our currency here in the eurozone. So the bullish euro-dollar bias that we have sort of stays intact here.
But yeah, I mean, fiscal divergences is, I think, going to be an ongoing theme for us in currencies. And we do still continue to like a variety of the better-than-currencies on that front, things like Nokia, Stocky, Swiss, Australia, for that matter, versus the likes of the U.S. dollar, Sterling, for example. And Yen also probably should fit that bucket, although we've been sort of not really putting that much emphasis there.
But given all the political noise, that's sort of been focused very much for Yen as well. So, Patrick, maybe with that sort of fiscal discussion out of the way, maybe we can move to you now. We've obviously had a much-awaited U.S. payrolls number, what, first take from here?
Yeah, thanks, Mera. So look, I thought coming into the event, I thought the risks were skewed asymmetrically for dollar downside here. If the print were to come in, you know, permanent expectations, I didn't really see a lot of scope for the dollar or Fed rate pre-pricing to re-rack that much.
I think, you know, basically what Powell told us at Jackson Hole, but a high probability of the September delivery. So kind of kicking off that process, I think, would ultimately still kind of cap any ability for the dollar to tactically rally on better data. But in the event, anyways, you know, it did come in noticeably weaker. 50K in the context, I guess, of the last few years isn't that much of a nominal surprise, but there was actually like a very tight distribution of economist consensus forecasts.
So the actual surprise was about 2.7 standard deviations. So clearly a miss, you know, pretty significant downside, private payrolls growth is running at a very anemic level. You know, at the end of the day, I thought all the contours throughout the, you know, most of the report skewed pretty weak.
And you couldn't even really point to like, you know, a supply component that was necessarily going to constrain kind of like the inflationary or the wage price where even kind of the over year ago wages came in a tick below consensus. So you had signs of weak demand. The U rate moved up and an unrounded could have, like, it was pretty close to breaking the 4.4 threshold at 4.34% unrounded.
And then again, the wages weren't, weren't terrible. So it really adds to like, you know, the sense of, you know, a weak overall profile. It's a very kind of like disinflationary day today in markets.
You got oil down, break evens down. You know, that to me kind of makes sense. In terms of the FX impact, then again, like, you know, coming back to this asymmetry, like we thought there would be more scope for the dollar to plumb the downside.
The move has been, you know, pretty sizable on the day, but in my preview, I kind of delineated or kind of, I guess, differentiated, you know, a really weak print versus kind of like just a generally weak print. I don't think this quite met the really weak qualification threshold, which is probably you have to be a little bit closer to zero, I think, or maybe even negative on the headline. And why that matters, I think, is that ultimately, you know, the contours of this particular print have actually led risks to generally rally.
And as a result, you've actually been delivered kind of like broad dollar weakness. It's not more of that kind of recessionary dollar underperformance versus reserves, but, you know, trading more firmly versus high beta or even outperforming the high beta block. The dollar has been sold pretty much entirely against everything.
So it's a nice shot in the arm for the dollar, as you say, has been kind of consolidating for a while. And, you know, the moderating kind of like U.S. cyclicals is something that we ultimately had been expecting and, you know, hoped to kind of take that next leg of dollar down. So we'll see where we go from here.
You know, Fed pricing is starting to look a little bit more crowded. You've got a tiny risk premium for 15 September. You've got two and a half kind of through the end of this year and about 150 basis points through 26.
So barring kind of more nefarious downturn in data going forward, you know, the bar is kind of rising there. But again, I think the U.S. is kind of softening on the labor market side. It's obviously important that and then the inflation backdrop, you know, it's been described as transitory by by Fed officials.
If nothing else, it's going to be corrosive from kind of a short term real policy rate channel in the near term. So I think that's kind of been trained as well. And then there's obviously still structural issues that we're contending with as well.
So as I say, I think the profile of this print was a nice shot in the arm for the dollar bear view. Yeah, I was, although I have to say the price action is a bit underwhelming in contrast to what we've seen on the rate side. And I guess I'm a I'm a bit impressed with this idea that, you know, that we've had a two back to back soft payrolls numbers, but yet the market is resisting quite strongly from pricing in a 50 basis points or at least some reasonable order of a 50 basis point cut in September.
It sounds like the rest of the demand data in the U.S. is just a lot, lot firmer. And maybe that's that's what's keeping along with the inflation trends being firm is preventing the market from doing that. But I think it's quite interesting if such a number couldn't get you to really do a lot more in the dollar.
I do wonder what will. So that's that's one thing to think about, I suppose. But maybe maybe we move to something a little bit more concrete on the European side, Octavia.
We've had a note that you've done on FX hedge ratios in the region. So if you could just give us the main headlines from there. And then also we have Norwegian elections this this weekend.
Right. What are the implications for Nokia here? Hey, Mira.
Yeah. So we've had recent data and interim reports from Denmark, Finland and Sweden, which overall showed that the increase in FX hedging of the real money sector had stalled by the second quarter and and beyond. So what this suggests to me, as we've been saying as well, is that we might need a renewed catalyst.
So either the dollar to break out of the range or the dollar equity correlations to really stay positive to get those who are who have stalled, who are taking a breather to start raising their hedge ratios once again. So in Denmark, we had a sharp increase in the dollar hedge ratio in the first months of the year up to April and then a stall. And then we had a fall in July.
So it's still a 70 percent, which is above last year's 63. But clearly there was a drop in July. In Finland, we also had a pretty sharp rise in the first quarter and then only a small tick up higher in the second quarter.
So pretty much unchanged. And in Sweden, interim reports of the four main public pension funds showed that one actively raised their hedge ratio and so had lower FX exposure in the first half. But the other three actually reported higher FX exposure.
So that's the only other place where we really have data to infer hedge ratios from in Europe is the Netherlands with the big pension fund sector. And we don't have updates there. So otherwise, that's all we have to really get a grasp of developments on this theme in Europe.
And on the Norway election, the base case is not for much FX reaction. But I'd say that risks are still asymmetrically biased bullishly. So the base case and most likely outcome, according to the polls, is that the left wing incumbents stay in power, but with a slightly more weakened coalition that might need support from smaller far left parties.
And then there's the main other potential outcome of a right wing coalition. In either case, our economists think fiscal policy will have to be subject to compromises and expansionary in any outcome, because the far left in a left coalition would probably push for more welfare spending, whereas the right would push for more tax cuts and more defense spending and interestingly, open up potential for some wildcards like a break off or change to the fiscal rule or even a change to the sovereign wealth funds mandate, allowing it to invest domestically. So to be sure, they're both low likelihood wildcards that have been floated.
But they would entail knocky purchases by Norges Bank and more funds deployed into the domestic economy rather than abroad. So they would be knocky bullish if they were to materialize. So I think rhetoric there is one thing to keep on the radar.
OK, thanks a lot, Octavia and Patrick and Frances. And thank you very much, listeners, for joining us today. Please take a look at our website if you want more information on anything we've discussed.
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. 2025 J.P.
Morgan Chase & Company. All rights preserved. This episode was recorded on September 5th, 2025.
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