Global FX: Bearish USD vs. EM FX risk appetite index, G10 cyclicals and the Fed
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.
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.
How firms align with this view
consensus1.1200range1.0800–1.1600
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.
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.
Risks to this view
A sudden hawkish shift by the Fed, unexpected geopolitical shocks, or a sharp reversal in global risk appetite could invalidate the macro-driven bullish bias. Technical signals may also precede a corrective pullback in risk currencies, particularly if positioning becomes overcrowded.
Hello and welcome to J.P. Morgan's At Any Rate podcast. I'm Meera Chandan, co-head of FX Strategy, joined today by a pretty full slate of FX strategists across the globe, Arindam Sandalia, co-head of FX Strategy, J.P.
Morgan from Singapore, Aneska who is head of EMEA and LATAM local market strategy, joining from London, James Naligan looking at European DM currencies and Patrick Locke from U.S. focusing on U.S. issues and the Canadian dollar. So a full global suite for you today, we have quite a bit to talk about, so we will try to keep it tight. I'm just going to start by making this proclamation that, look, we are seeing a geopolitical policy risk uncertainty stay very elevated, reaching new highs probably, you know, week after week.
There's new curveballs being thrown at us. But if I'm on the lookout for any sort of persistent macro themes, I do find it the data and the messaging from macro data is pretty clear. We're in the midst of a highly pro-cyclical environment, one we haven't seen probably since the post-COVID era.
I mean, I'm looking at various metrics of growth surprises, growth forecast revisions, the breadth of these revisions. It's all very much in the green. And as far as I'm concerned, you know, we are getting these volatile events from time to time, but it seems like given all the fiscal and the monetary policy easing that we've had in the pipeline, growth is on a tear.
And the point that we made in our year ahead outlook is that, you know, if you have an environment in which central banks are relatively inactive and growth is picking up, needless to say, that's going to be sort of low volatility, supportive of cyclical currencies, supportive of FX carry, and usually tends to be bearish the dollar. So readers will recall that we have been, you know, sort of talking about the year ahead outlook and we titled our outlook bearish dollar bullish beta. So that's really the main message that I want to send from my side is that we find ourselves persistently in the middle of that environment.
The three things, the three points I'll make here is that a major risk for the dollar in my mind had been a potential hawkish repricing for the Fed. And as I look at how the Fed is priced right now by markets, that repricing has already done a fair bit. We've got only, I think, about 43 or 42 basis points of cuts priced in for the next year, about 30 and change for the next two years cumulatively.
So that's basically the fewest cuts priced in almost a year. So it's less sort of less of a risk for dollar, you know, strength at this point. So I think still ISIS things skews risks towards a weaker dollar in my mind, unless the Fed is actually willing to put hikes on the table and the market is willing to price that in.
The second point I'll make is the Fed independence issues might take a bit of a back burner because the initial reading from the Supreme Court case is suggesting that that case might not go in Trump's favor. But there wasn't much priced in for FX on that in any case. So I'm not really viewing that as a major deterrent.
It was just an asymmetric tail risk. And then finally, you know, if we do get a de-escalation of tariffs on this Greenland issue, maybe it's not done yet. I do think price action is showing this week that that's a dollar negative.
And likewise, if we get a de-escalation, that's going to be good for risk sentiment, I think also puts us sort of in the middle of the dollar's mile. So at least from my point of view, the risks to the dollar are asymmetrically skewed to the downside. And my biggest sort of high conviction view here is still focused on pro-cyclical currencies should be doing better.
And Eurodollar itself, I think, you know, we are bullish on it, very mildly so. But it's, I would say, in the grand scheme of things, a pretty low conviction view, especially in contrast to last year. Now, and what I'll end by saying this is I'm struggling to see what really derails this very benign story for pro-cyclical FX.
Now, famous last words, I don't want to jinx this, but the track record, as we all know, is also that the start of year trades tend to run out of steam by the end of January. So, you know, while we're keeping our O-rates and cyclical currencies, we are sort of introspecting, if you will. Aneshka, I think probably a good time for you to come in here because some of the signals that you have constructed are actually suggesting that EM currencies are in highly overbought territory and you're paying a lot more heat to that in contrast to my very bullish comments.
So stage is open, please, please do provide a counter to what I just said. The way I would phrase it is that at this moment, it's very hard to provide a macro-based, catalyst-based counter to what you've said. It sounds all very reasonable and we all very much agree, and that's exactly the sign of a consensus view.
In our technical indicators, the EMFX risk appetite index right now went to extreme positive territory. Whenever we get this sort of signal, it always feels very uncomfortable to take the other side of the argument because almost nothing suggests there's any other side. That's exactly how extreme positioning has felt in the past.
Whenever we got extreme signal from this indicator, we felt like we could not string together a reasonable hypothesis. Why would the consensus have to unravel? Now the track record of this signal, I would say, is pretty good.
The last 10 signals on it have all delivered a positive return. The last time we did not have positive return on a contrarian signal from this index is during the COVID time where market price action was extreme. This time could be different.
We ask ourselves each time when we get a signal on this, could this time be different? And obviously, there is some probability. On average, one out of 10 signals are wrong from this index.
What could go in that direction is that the index is primarily trained on a dollar bullish cycle period. The index does not start far enough for the period where dollar traded in a bearish environment to be part of the picture. And it's also trained on a primarily bearish outlook for EM flows.
So these could be sources why perhaps it might give a less valid signal right now. But I do certainly feel that the consensus around cyclical views is very strong. The data surprises are at extreme level.
But when we also look at our global activity indicators, they are mean reverting index And from the current level of activity data surprise globally, we normally see a mean reversion so that the activity data stops this positive momentum. And basically, the consensus have caught up to the surprises. So that is the opposite hypothesis.
Although I must admit, I would not go as far as to say to be short EM effects. All we've done is taken step back on some of the currencies that have performed really well. Well, you had a good call so far.
So I might find myself thinking in a couple of weeks that that was the prudent thing to do. But let's let's see what happens. And let's move to Asia.
There's a lot going on there. I think what's been really tracking, you know, catching my attention is the dollar CNY move lower. And we've had a pretty sort of decent break on the fix.
I think this week for dollar CNY through seven, to me, the prime beneficiary that I've been looking at it through the DM lens has been for Aussie, which is also finally getting traction given the domestic developments that's happening. So that that's pretty good from my point of view, but is you think the dollar CNY move continues? And then, of course, there was the BOJ today with some signs of intervention perhaps coming through.
Any comment on that as well? And, of course, any pushback on the benign view that I laid out, that would be good. Yeah.
So CNY, BOJ, benign view, CNY, I think we did get symbolically at least something that was important this week. For the first time in three years, we got a dollar CNY fixing just below 700, the figure in the past. This has been a historically important psychological threshold in the past.
BBC has tended to defend this more stoutly than it did this time. And I think, you know, just in client conversations, the feeling that I've gotten over the past couple of weeks was there was a sense that this dollar CNY downturn had been almost too clean. And this is not the way CNY normally trades.
And there was a degree of caution around a potential squeeze higher in dollar CNY. Dollar CNY has not done anything untoward at all. It's not squeezed higher.
It didn't make new lows after today's fixing. But my sense is that there may have been a little cleanup in at least short-term participation in that trade that could get reinstituted now that you have this sort of accommodative signal from the PBOC this week, plus some of the work that we've done on equity flows seems to suggest that in addition to exporter conversion, that was the prime mover of the CNY move in December to early Jan. It looks like foreign equity inflows into China have already started to pick up.
And this could be the second pillar of a slightly more protracted bullish CNY move. So as far as we are concerned, we're sticking with our bullish CNY views here. Although, again, in conversations with people, we find ourselves moderately constructed.
We have a 685 media view. There are people out there doubting 650 to 670 type numbers, and we don't find ourselves there just yet. On BOJ, yes, we did get yet another BOJ that delivered a net bearish outcome.
The meeting itself was tinged with sort of hawkish elements such as upward revisions to growth and inflation forecasts over the next couple of years. We did get a hawkish descent as well. But as this kind of proforma in these meetings, the Q&A did lean dovish, and at one point the governor did raise the possibility of coordinated action with the government to stem the disruption in government bond markets.
This was in response to a question, and I think that's where the essential problem for the yen lies, is that there is a problem on the bond market side. There is a problem on the yen depreciation side. The BOJ's mandate is to have price stability and financial stability and domestic financial stability is primarily centered around the bond market at this point, and if there's a choice to be made, it's a difficult choice, but our sense is that the effects will be allowed to free float relatively more, which is why we've held this kind of bearish and median term view for a while in line with the view of the world that you laid out at the outset.
The twist in the tale, of course, is the threat of intervention that has loomed over the yen for the last several days, if not the past couple of weeks, and today after the BOJ meeting when Dollyann peaked into the 159s, there was some speculation in the market that the BOJ had done a rate check, which typically precedes intervention activity. So that threat exists, and Dollyann did pull back, but I think the revelation was that the pullback didn't stick, and it was quite shallow in the end. These BOJ interventions have been quite effective in at least stemming the uptrend in Dollyann, which is why I think clients generally are concerned, respectful of the tactical threat, but I don't think it does much to derail the median term view on the yen, which by the way did get a fillip this week because today was the official dissolution of the diet, but also on the campaign trail, the Prime Minister has also talked about consumption tax cuts.
The Finance Minister has said that they are not going to be unfunded, but how exactly the 5 trillion yen of funding is going to be arrived at is quite not clear. I think that's why bond markets had that nasty reaction earlier in the week, and that's going to remain a bump there for the yen. One very quick comment on the risk climate, I agree with everything that you said as well as Aneshka said.
The only thing I'll say is we thought we were in a similar position at the end of June last year, and that sort of marked the end of the dollar downtrend for 2025 at least. I think one key difference between that juncture and this is that while the risk appetite signals are almost exactly the same point, the ferocity of the dollar move that preceded it, the undershoots on the dollar that you tended to get back then are not there, and just in conversations with people as well, and maybe Pat can back this up with his positioning data, we don't get the sense that the dollar trade in general overall is as consensus as widely owned, at least within the G10 space as it might be in EM. So that uniformity may be missing in the dollar piece this time, which could at least give us on the dollar G10 high beta side of things a bit more of a runway than it did last year.
Yeah, that sounds like music to my ears, Arindam, but let's see. For what it's worth, we did take a look at the track record of the EMFX risk appetite index, and yeah, for EM it's actually had a pretty solid performance. It seems like DM tends to have a little bit less follow through.
So James, let's talk about European currencies here. You've had a really good call with the Scandis and Sterling as well for that matter. We've had more large moves this week.
What's going on there and has anything changed in the outlook? Yeah, on Sterling, there's been a lot going on this week, as you say. Politics coming back into the spotlight a little bit with Andy Burnham rumoured to be making a charge on the back of the resignation from Andrew Gwynne.
We just think it's a little bit early to trade these kind of risks. I think this kind of leadership challenge is probably more likely to come after the local elections in May. The last thing they want to be doing is taking power and then being trounced by the Reform Party in the local elections.
I do think there will come a time to think about Sterling downside if you get the kind of combination where you see more material disinflation in Q2 plus the politics kicking in. I think that's enough to be thinking about Sterling downside, but I think for now, particularly after the PMI this week, we've been pushing a narrative of post-budget rebound in the UK economy. I think there's room for the market to kind of mark themselves to market on that view now given that you are actually seeing it in the sentiment data.
So we're still kind of tactically bullish Sterling, mainly on the kind of cyclical crosses even though Sterling is trading quite rich at these levels. So we're looking at it more versus the likes of Swiss if we can get past this geopolitical risk. For Scandi's, as you say, pretty sizable moves this week.
You're actually seeing Noki participate as well. I think certainly for Stocki there's definitely some help on the de-dollarization, repatriation angle where we've seen the stock of holdings in Sweden of U.S. assets is sizable. It's over 50% of GDP, but more importantly, we've actually seen past episodes of the willingness of Swedish investors to bring capital back as we saw in Q1 last year.
And the rotation that you're seeing at the moment looks very similar to that in our view, as well as the pro-cyclical backdrop in terms of the data in Sweden still coming out pretty solid. I think that's a growth heading up to 2.5% in Sweden this year. So we're pretty comfortable that Euro-Stocki can break comfortably below 10.50 and below.
And then Noki, I mean, there wasn't much to see from Norges Bank this week, and I think the lack of positioning there is probably maybe playing a bit more of a part now in terms of I think a lot of people have almost given up on the Noki trade, but the fundamentals are still quite solid in terms of growth, yields, and the global backdrop. So some catch-up potential there. I think more broadly, you know, in the spirit of kind of devil's advocate in terms of, you know, I do buy into the pro-cyclical view.
We've been pushing that, but, you know, to Anetka's point, the risk appetite is being triggered. I'd just add a few points in terms of what could maybe cause a bit of a correction here. I think the equity rotation we're seeing, typically they don't end without some kind of correction in U.S. equities, which we haven't really had yet.
They've really just been going sideways. So that is something to watch out for. I'd also say the U.S. curves look like they're flattening pretty aggressively now.
You know, 5's, 30's is broken below 100 basis points. That's a bit of a warning sign for high beta, I'd say, even though it's coming from a place of stronger growth, but it's also kind of obviously impacting Fed pricing. And three, I'd just add kind of the art of the deal on Trump's side.
You know, I think the tariffs have been dropped, but we all know the kind of playbook here that things could be ratcheted up at any moment to potentially more extreme levels. Thanks a lot for that, James. Patrick, let's talk about what's going on on the U.S. policy side, I guess the Lisa Cook case, and then also the Canadian dollar.
We do have the BOC next week. Yeah, BOC and the Fed. So I guess, yeah, with Lisa Cook, I mean, general consensus is that obviously it looks like it's going in Lisa Cook's favor.
There are a couple important conservative members of the court that seem to lean in kind of a more skeptical direction. So obviously that's been well received, I think, by the market and has probably continued on to support the risk dynamic more broadly, not kind of like a major U.S. policy pothole for the AFX space, not completely decided yet. It's still not clear whether they're going to rule on the injunction or whether they will pass it back to the lower courts to decide on that, plus the merits.
But I think the initial observations from the market perspective were good in that there's not going to obviously be some ball shock. Worth noting as well, we had a third opinion day as it relates to the IEPA ruling, didn't get it. That might mean we might not hear on IEPA for about a month.
And that matters because obviously, you know, Trump is still using tariffs as a means of leverage as we saw in the Greenland case. So I think that's notable as well. Looking forward to the Fed, I mean, I don't think it's going to be kind of like a big thing for the dollar, really.
You know, on the downside, the labor market data has shown some degrees of stabilization that kind of motivated taking out our call for a January cut a few weeks back. And obviously, this is on the back of what has transpired with the DOJ. So that's hard.
You know, basically, that means for me, it's hard to see a situation where the dollar really sells off on any kind of like very dovish outcomes. On the other hand, while the labor market stabilizes, it's not obviously growing fantastically at the moment and inflation outturns have been probably on the softer side of expectations the last couple of months. So that also, I think, precludes kind of like a really hawkish outcome that would drive the dollar meaningfully higher.
So I think at the end of the day, it's not going to be a very major vol event for the dollar, which allows us to kind of continue trading, you know, the macro conditions that you've been you've been describing that I generally agree with. On the BOC, similarly, I don't think that's going to upset kind of the bearish CAD view. They had an opportunity in December to kind of validate high pricing based on the labor market data that had been better.
They chose instead to look at the data with a degree of skepticism like we were. And since then, inflation outturns have also been soft and the unemployment rate has moved back up. So no reason to think that they have any kind of material hawkish turn here, if anything, I'd say the risks are probably a little bit more dovish in their overall tone.
So it's pretty comfortable sticking with kind of like, you know, the bearish CAD overall view here. And then finally, you know, relating to your original points and the pushback, I'd pick up on what Arindam said. Our aggregate metrics of dollar positioning are basically flat, which is interesting because it tends to historically co-move inversely with the EM risk appetite index, i.e. when the risk appetite index is way up, that tends to mean like a very strong environment of dollar shorts.
That's not really the case. And my case in point is that euro dollar positioning is like more or less flat, right? And so there's not obviously like a major dollar short to deleverage on any kind of like technical correction.
Moreover, what I would describe is I think it's really kind of more of a situation where popular EM and high yielding carry trades are well subscribed, but that hasn't obviously manifested in the same position in the pro cyclical G10 space. But I think those trades are relatively less encumbered from a positioning perspective. The one pushback that I'm still thinking about, I don't think it's a particular concern from a Fed side at least, but obviously rate markets are obviously pricing on hikes fairly aggressively.
You see that, you know, in the Asia complex, Aussie, Kiwi, CAD to a lesser extent, certain pockets of Europe. So I would question, you know, obviously like cyclical tailwinds have been boosted from the better part of one to two years of an easing cycle. What happens if global macro conditions are such that maybe we're more at full capacity than we thought?
Employment is still relatively full. Inflation starts to turn a little bit higher at the global level and central banks have to respond the other way. Could that challenge, you know, the growth and pro-risk environment on a three to six month basis?
But, you know, for the time being, at least in terms of like a tactical perspective, I don't think that's something really to worry about. Okay. Thanks a lot, Patrick.
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