Global FX: Bullish Beta, Bullish Dollar

Hello and welcome to J.P. Morgan's At Any Rate podcast. I'm Meera Chand and Co-Head of FX Strategy at J.P.

Morgan. I'm very pleased to bring to you this week our full format year ahead, mid-year ahead Outlook Roundup. So this is going to be a quick fire round, slightly longer format than usual.

We're going to go around the globe, start with Asia, work our way through Europe and end with the U.S. and Americas. So as a background, you know, we did, you know, when we wrote our year ahead outlook that was at the end of November last year, the theme was bullish, beta, bearish dollar. The only part of that view that changed after the U.S.-Iran conflict was the bearish dollar part where we actually had a flip in view.

We turned bullish dollar as, you know, as the conflict started. The idea was there was a terms of trade component that was helping the dollar. And since then, U.S. exceptionalism has been making a comeback.

Beta trades, which is FXCADDY, have actually continued to deliver for all the hand-wringing around the dollar view, FXCADDY is the strategy that's been paying the bills. You know, returns are pretty substantive year to date, particularly if you're looking at real yield signals. And as we go into the second half of the year, the theme around bullish beta is still unchanged.

You know, that continues to be a core part of the theme. But the difference here is instead of being bullish beta, bearish dollar, we are now bullish beta and bullish the dollar, if that's possible. The reason to be bullish the dollar is U.S. exceptionalism.

We've unpacked that multiple times on this platform before. And it's basically the exceptionalism story, which is showing up in multiple dimensions, including yield supremacy. The dollar already yields more than half of the currencies globally.

Bullish was orthodox, which he thought was an outcome that would be hawkish. But I think he was even in the underlying commentary more hawkish than he had anticipated, given the emphasis on price stability. And then certainly the dots were hawkish as well.

So we're going to unpack that. But as we've written and discussed in the last podcast, the typical playbook for this is for the dollar to strengthen in the six months or so going into the first Fed hike. So, you know, still thinking this is potentially a bounded move on this, you know, and it does require sort of to be corroborated by the data.

So it's not going to be a straight line. So it is binary. It is data dependent.

But for what it's worth, I got a dollar downside target, if you can talk about that already out of consensus, bearish at 113 on the downside, we do see that sort of shifting lower, you know, towards the 112 area, 110 could also come into play, depending on the timing and the intensity of Fed hikes. So watch this space. But in a nutshell, we are, you know, definitely constructive, the dollar versus low yielders like the euro.

G10 in particular is chock full of high beta low yielders that should be under the pressure in case the Fed hawkishness continues. The bullish beta on the FX carry part, look, the highest conviction view for us is actually the more constructive view on FX carry, it can work in multiple scenarios, even with Fed hikes, even without Fed hikes, as this would, you know, and particularly in the case of Fed hiking cycle, this kind of puts pressure on the funders and as a net result, carry can still do well in that environment. So that team remains intact, boring, but consistent.

And as I said, paying the bills. So let's now unpack and start our journey around the world. As usual, we're going to try and keep it three minutes per speaker.

And let's start with Asia. So Arindam, you know, what is the view on dollar CNY from here, obviously very much in contrast to what's going on with euro and broader Asia complex as well? Yeah, sure.

The biggest point of focus for us in Asian FX, clearly the CNY as you say, the view is heavily consensus. Almost everyone we know is bullish, positioning is accordingly quite heavy. And the disconnect of dollar CNY from rate differentials and dollar CNY is several big figures too low, is beginning to look like a stretched elastic rubber band on charts.

And that is the thing that is top of mind for people who are in this particular position. And all of this is happening at a time when China data seems to be rolling over. And as you said in your remarks at the outset, the FOMC has just informed us that the Fed will no longer remain asymmetrically dovish.

Now, if that sounds like the opening gambit or a V-shaped change in view, I'll be sorry to disappoint you. It's not. You know, we are still moderately constructive CNY in the second half of the year.

We think that the trough is somewhere around 670 or thereabouts. But we are not as built up as some clients we speak to who are targeting spot in the 650 to 660 sort of range. But we're still net-net constructive because A, flow support for the CNY remains as strong as ever, albeit with a bit of a mixed composition compared to early Q1, exporters are selling fewer dollars than before, foreigners are buying more Chinese assets than before and domestic outflows are a little less than before.

So that's a bit of a change. But most acutely and importantly for CNY bulls, policy support in the form of fixings is still stubbornly intact and it's anchored by what we think is an important geopolitical event in Q3, which is another President Trump-Xi summit in the fall. So this is the tension between positioning, valuations and data on the one side versus the policy slash geopolitical imperative on the other side.

And net-net, we lean moderately constructive, but we are trying to keep that optimism in check. And just a quick word on them on the highest conviction views on Asia FX. Yeah.

So broad Asian FX remains, unfortunately for us, a bit of a straggler versus the rest of EM. I think a couple of changes in H2V, H1 are probably worth highlighting. First is that there was a big North Asia versus South Asia gap that had opened up over the last several months because South Asia in particular was hit by the twin shocks of being on the wrong side of the AI trade, as well as the energy shock because of the Iran war.

And most of South Asia are big oil importers. I think that gap is going to narrow in H2 because of the supposed resolution of this trade situation and also because South Asian central banks have stepped up resistance to FX depreciation. And I think those measures are going to bite as we get through Q3.

So we've turned somewhat selectively constructive in a place like INR, which has been underway for most of H1. The second change I'd say is that we've closed out optimistic bullish views on terms of trade beneficiaries. There are not a lot of them in this part of the world, but Malaysia was one of them that was benefiting from higher energy prices at the margin, and I think that trade has basically seen its best days.

And then I think the biggest story, the headline story for Asia as a whole is going to be after the region specific energy shock comes the global beta of higher US rates and a stronger dollar in the second half. So there remains a lot of work for central banks to do, and we continue to like the region's low yielders such as the same dollar and the Thai baht as funding trades, funding legs of carry trades. That's great.

Thank you. And let's move to Japan. Junya.

Yes. So in conclusion, we think it is likely that Darien will continue to rally, and that probability has increased that our long held target of Darien 164 will be reached in the second half of this year. The key catalysts for further rise are broad US dollar strength driven by heightening expectation for head hikes and possible resumption of concern about Japan's fiscal policy.

On the former, historical patterns suggest that in the six months leading up to the Fed's first spike in the cycle, Darien tended to rise by 4.5% on average. On fiscal policy, I think Ikue will comment separately. So I would like to focus here on the MOF intervention.

For Japan's authorities, the ultimate line in the sand level of Darien appeared to be a cycle high at 162. Therefore, if Darien continued to rise from here and approaches 162, another round of intervention is likely to happen. Meanwhile, however, Japan's authorities are likely keen to avoid the perception among the market participants that a significant decline in FX reserves have materially dampened the capability for further intervention.

From this perspective, we expect any additional intervention to be capped at around 12 trillion at most, broadly in line with the previous operation in April and May this year. Given that Darien decline triggered by that last intervention was fully reversed in less than one month, any another round of intervention is also likely to be insufficient to halt the uptrend in Darien, in particular, which is supported by fundamental factors like dollar strength among heightening expectation for Fed hikes. That's from me.

Thanks a lot, Junya. So Ikue, let's move to you on the fiscal side. I think that's been a big sort of source of pressure on Yan given the rise in JGB yields.

But maybe you can just walk us through the timeline there. Yeah, thanks, Mira. So for the coming weeks, it'll be important for Japan's fiscal policy.

First of all, in July, the PM Takahashi is expected to announce the basic policy on economic and fiscal management and reform, which basically sets out the guiding principles for the fiscal policy going forward. We just had this supplementary budget for FY26, 3.1 trillion yen, but this is merely for the energy subsidies. So for the upcoming additional fiscal packages, the guideline is likely to be shown on July.

So that's something to watch for. And another, because of this fiscal concerns, we continue to think that the Japanese institutional investors have remained absent from the JGB market participant, despite the sharp rise in the yields. Also, we think that the repatriation story is likely to remain subdued for second half.

But it does worth highlighting that one potential wildcard to monitor is GPIF, which will show its annual report in the first week of July. And we will watch closely for potential change in the JGB allocation for the GPIF, which could potentially allow the JGB weight to increase and to potentially support both JGB market and the yen market. Thanks a lot, Ikuei.

Arindam, before we hop off, maybe, I know you're going to do a separate podcast on FX options, but any high-level takeaways for the macro listener? Yeah, I know for the umpteenth time in recent years, I seem to be answering this particular question by saying we are entering so-and-so phase of the year with FX fall at multi-year lows, right? And I'm sorry to report that that is once again the case with VXY, very cheap versus business cycle drivers.

Our timing models are starting to turn more defensive. But the problem is the difficulty in identifying catalysts ex-ante that will cause a big turn involved. So in general, the second half of the year tends to be a half of two halves almost.

The first part is characterized by summer doldrums that way on fall in July into early August, and then things seem to pick up a little into Jackson Hole and back to school in the US fall. So I think that should broadly be the contour of all this year as well. We are mindful that there is not a lot of value at these levels of vol to be engaging in classical vol carry harvesting strategies.

So what we are telling clients is that your primary alpha team for the second half is to exploit the high carry by vol ratios through options in these specific spots like Sterling Swiss, like Dollar Hong Kong, where these ratios are extremely elevated. And for prudent portfolio construction purposes, we are also pairing those carry trades with carry efficient ways of being bullish vol and owning dollar correlations. So net long carry and net long vol sort of mirroring the bullish dollar, bullish beta barbell that you discussed on the macro side.

All right, thanks, Ari. Let's just wrap up with the last but not least in Asia, Ben Jarman, any thoughts on Antipodeans? Thanks, Meera.

So with the Aussie, I think there's growing appreciation that the forces that drive outperformance closer to the start of the year are waning somewhat. So there was obviously the RBA's uniquely hawkish take at the start of the year, strong inflation numbers, which we had coming in, and then the Middle East situation kind of driving a bit of a terms of trade energy kind of story. So we think largely speaking, those are sunsetting now.

A couple of things, maybe which I guess have been a little bit less appreciated. One is just on the China side. You know, we've remarked globally about China's underperformance in economic space, but just the correlation that we've seen between Aussie effects and China asset returns since late February has been pretty striking.

So we think, you know, on the downside, there is still a bit of a weight around the neck of Aussie in the absence of a China data recovery, and that's starting to bleed into some other proxies like iron ore. Then I guess on the other side, there's probably a higher floor for Aussie than we looked at last year, given that we have accrued three hikes and obviously carry and still a pretty supportive fiscal situation. But we think that the inflation side of things is probably a bit underappreciated in the sense that there is growing downside risks to the RBA's forecast.

So to the extent that we've already had the bad news on growth from high interest rates, there's maybe a bit of a silver lining here in that if inflation comes down, as we expect, a bit faster than the RBA expects, it's going to lend a bit of a, I guess, less constrained sort of outlook on the economy from here. So, you know, kind of tight range, but ratcheting lower, we think, for Aussies is the outlook for the second half. For Kiwi, you know, I think the directional story has been pretty straightforward, which is that the RBA said it's probably going to hike from accommodative levels, growth's picking up.

There's been quite a bit of scepticism, I'd say, in terms of the client set of, you know, can they deliver the forwards and how robust is the recovery? I think GDP numbers this week give us a little bit more faith, and particularly because we're now seeing that feedback loop from population growth into GDP itself, which I think tends to be underappreciated at these levels of net inbound migration. You're adding about, you know, four tenths to GDP growth every quarter, sort of straight off the bat, which tends to, over time, feed into a stronger housing market and make financial conditions feel just a little bit less restrictive.

So we think that virtuous cycle is still broadly on track, keeps us somewhat more constructive, Kiwi. But of course, with the caveat that we do need globally, you know, growth to be on track and financial conditions via the Fed channel to not be too much of a headwind. Thanks a lot for that, Ben.

Do agree that the domestic backdrop in Australia is not really providing new catalysts for strength, but the carry tailwind is still, I think, constructive for Aussie dollar. Kiwi, on the other hand, even though the bottom up story is changing, I think from a top down perspective, the yield deficit, the carry deficit, the large external balances are all too big, too large of a headwind. And I think it's a bit early to sort of engage in bullish Kiwi views.

I think it's better used as a hedge from a top down perspective for what it's worth. But let's go on to Europe. I think, you know, we already spoke about Eurodollar, which is, you know, we do have a bearish stance in general on the euro, given the lack of yield, the lack of growth.

And now with some of the twists that we're getting on the US side of the equation, sort of looking at, you know, targets which are closer to 110 to 113, let's call it. But James, why don't we just delve a little bit deeper into the European currency outlook? Yeah, sure.

Thanks, Mira. So in terms of Europe, I'll start with Sterling. And, you know, as we speak here, we have the maker field vote today and tomorrow in terms of the results.

So, you know, we're pending that. But there is a lot we can say about the second half of the year in terms of, you know, I think the first few months potentially are going to be a bit more tactical. It's going to be a scenario dependent.

But we're more of the bias to kind of tactically buy dips in Sterling. And so if you think about the different scenarios out of maker field, perhaps one of the more bearish ones might be if Burnham gets a large majority, say well over 5 percent, and then there's a kind of relatively swift correlation for him in July. And maybe he takes a bit more risk with his policy message.

I think you could you could easily see Euro Sterling test the trend resistance channel that comes in and comes in just above 87, which is around, you know, coincidentally around about where fair value is as as well. And, you know, unless he goes really quite extreme with his policy message, we'd actually be minded to to sort of, you know, to fade the Sterling weakness at that point. And the more kind of benign scenario might be, you know, if Burnham wins, but Starmer kind of puts up a fight, you end up with a leadership contest that runs through the summer recess, might include streeting as well.

And then, you know, carry and positioning and UK resilience and maybe even the Bank of England are a little bit more supportive for Sterling. And you could see a little bit of a squeeze of shorts back down through that key support that we have just below just around 86, 20 in Euro Sterling. And that's that's what we're kind of waiting for.

But what we can say a bit more certainly as you get deeper into the second half is that as you get closer to the budget, the autumn budget, as you get to the point where, you know, Burnham's true intentions with policy would become a bit more clear, you can, you know, bake a fair bit more fiscal risk premium into Sterling. You can potentially see Euro Sterling head up towards the kind of 88, 88, 50 area as Burnham's intentions for the budget become a bit more clear in the scenario that he becomes PM. That's still obviously to be decided.

So those are the kind of scenarios we're thinking about. But we are more biased towards the end of the second half of the year where Sterling could actually bake in some risk premium. And over the next couple of weeks, we're a bit more neutral, you know, thinking about Sterling a bit more tactically.

For Noki, you know, you've had a bit of a backup in valuations since late May. You know, part of that driven by the dollar, part of it driven by the move in terms of trade. And we are minded for that to reverse.

And, you know, Euro Noki to head back down towards the kind of 1090, 1080 type level. You still have really solid supports in terms of what was, you know, if we just think about what we saw from the Nordisk Bank today, raising the neutral rate, signalling some chance of more than one hike. We say that August is on the table for a hike that just cements the status as the high yielder in G10, keeps those carry inflows coming in, we think.

And in addition to that, you'd still have resilient domestic growth, you know, and you have the Nordisk Bank buying the currency and you still have an environment where we're not fully out of the woods yet in terms of the Iran conflict and energy prices are likely to only partially normalise. So we're still very constructive on Noki as a currency. And then I'll talk about Swiss as well.

I think there's some some very interesting properties for Swiss in terms of thinking about it as a way to trade much more resilient global growth, particularly against the higher beta currencies. When we think about the fact that you've had a war and an energy supply shock and you still have the global manufacturing PMI making new cycle highs, I think it's it's a dangerous game to try and be defaming that even in a world where central banks are tightening. But in that world where central banks are tightening, Swiss does stand out as a funder, particularly against the you know, when you think about the other funders that you have available, things like the yen, where you do have the risk of MF intervention.

But, you know, what we thought, what we saw from the S&P today was them maintaining the guidance around the currency, maintaining a heightened willingness to intervene. And that that keeps Swiss as a funder. It also creates some symmetric properties in terms of, you know, when you do get that risk off, they are more willing to be there in terms of in terms of Euro Swiss.

But the way we're thinking about it is more versus the high beta currencies. I think the issue for Euro Swiss is that eurozone growth is the optimism there is not quite what it was. It's more of a global story.

So not necessarily looking for Euro Swiss to motor higher. It's more of a total return type of paradigm for Swiss where you're thinking about the carrier. That's all from me.

Thanks. Thanks a lot, James. Let's let's move on and wrap up the rest of Europe.

Octavia, what are the main takeaways from you? Hi, Meera, I want to make three points. I'll start with the bearish stock view and then I'll get to broader flows.

On stock, now with the end of the conflict, there are questions about stock being a recovery candidate given it's an importer, but we don't think so given its low yield and domestic headwinds because the bear story wasn't just about the conflict. So if we ask what it would take for a recovery, I'd say on the domestic side, the conditions are firstly for growth and inflation to pick up after they missed expectations for several months. And secondly, for equity momentum to move back consistently and stock is favour enough to encourage retail to repatriate again, like we saw in Q1.

And that's currently against it and incentivising net outflows. But even if those domestic boxes are ticked, I'd argue the more important driver is what US yields and data do, because in recent years, these have actually mattered more for Eurostock than rate differentials on their own. And so even if the domestic picture were to improve or you're getting relief on the energy side, it's hard to stage a recovery for stocky when it's a low yield globally and the Fed is hiking.

And then I touched upon this stock equity flows, but I'll also give you a rundown of broader flows in G10 and on the trade balance and hedge ratios. So looking at changes in the trade balance and the conflict. Nokia, CAD and the dollar have improved, which makes sense given their energy exporters.

But Aussie stands out with a deterioration, including on the fuel balance because of oil imports. And this also comes against the broader trend deterioration in its current account since 2022. And meanwhile, Kiwi's trade balance has actually improved relative to this time last year.

And that's also part of a broader trend improvement in the trade balance and current account. But now if we zoom out and look at how yields compensate for current account deficits, even with this narrowing in the deficit, Kiwi's yield is still too low on a relative basis since it's still the lower yielder in the block of similarly large deficits. So it's still not very attractive from that standpoint.

But you know, net net, it is an improvement relative to half a year ago. And meanwhile, Aussie looks a bit worse than it used to on this basis. And lastly, the third point on hedge ratios, the bottom line is that hedge ratio increases are not a live FX driver for the second half right now since they've gone largely dormant except for the latest Q4 data for Aussie, which was showing a continued gradual increase.

But in Europe, ratios rose in 2025. But then time here, Danish and Finnish data showed a partial reversal since then. And we think they'd only really reactivate if you're getting either a weaker dollar range break or another dollar equity correlation flip like we had in the first half of last year.

So for now, they're not so much in play. OK, thanks a lot, Octavia. Let's move on.

I think I think the main message so far is that the bearish sort of stance on some of these cyclical low yielding G10 high beta currencies is appropriate. Things like stocky Kiwi CAD, for example. But Aneshka, let's go to the more optimistic side of the world.

If you could talk about your top overweight in the EM side and also if there are any good risk hedges or shorts within the EM space that you would like to flag. In the EMEA, EM and LATAM space, we are quite constructive on FX. It's partially driven by the higher yielding aspects.

But let me highlight a few stories that stand out in terms of the bottom up fundamentals. The first one I would highlight is Hungary, which has been on our radar for a long time. But what I would emphasize is that following the election, FX strength, in my opinion, remains a core part of the government strategy that is necessary in order to achieve the Marshall Criteria and the objectives that they have on euro adoption.

Let me explain that a little bit more. For euro adoption to be achieved, the government needs to deliver a much lower fiscal deficit. They need to deliver a lower inflation.

And for both of these objectives, they need to deliver a lower policy rate for a sustained period of time so that long end yields decline and they can refinance that at lower yield. And obviously, the inflation picture helps. Now, for these objectives, together in an environment where the growth is likely to be strong because of EU funds, FX strength, sustained FX strength should be very much part of the package.

Additionally, we also expect the currency to be much less volatile as the fundamentals continue to improve. So that's that's one story. Another one I would highlight from a bottom up perspective is Mexico, where we are also constructive.

It's quite a different story. What I would emphasize there is that the currency continues to enjoy very strong BOP support. We do not think it's heavily positioned at the moment.

The strength in Mexican Peso, in our view, has been primarily driven just by the fundamental BOP factors. And what is interesting there is that we think some of the USMCA uncertainty impact on investment or FDI could start to fade as businesses move on from this issue and we could see growth pick up into the second half of the year and 2027, which in turn would then make the central bank much less dovish with basically the next move likely hike, not a cut. Final story to highlight is South Africa, where our own commodity projections are for continued and meaningful increases in the terms of trade, which then obviously supports the current account and the general fundamentals of the currency, together with the fact that the central bank has turned more proactively hawkish.

Now, in terms of any hedges or shorts, this is where it's a little bit tricky in these two regions, because obviously, if the external environment turns very sour, everything can sell off. But when we go bottom up, when we look at the country's fundamentals, in EMEA, Yemen, specifically, we struggle to identify currencies with particularly problematic setup, with, let's say, balance of payments issues or too low reveals. So on that front, actually, the fact is that the bottom up, bottom up stories do not very easily lend themselves to shorts or hedges.

OK, thanks a lot for that, Aneshka, does reinforce the point that a lot of the founders and hedges, risk hedges actually come from the DM side. Antonin, a quick rundown from the systematic models, what should we be thinking about as we go into the second half? Sure, I'm going to start by reminding where we are in terms of FX rivalry year to date.

So the first half has been characterized by generally OK for cyclical trades, equities are up even if there has been some volatility. And we also seen a resurgence in inflation and oil prices. So in the FX context, that means like global and EM carry basket did well.

But the key point was on the implementation, like the carry has delivered twice the return of the nominal or risk adjusted basket as the context was generally more inflationary. In G10, FX has been quite logical in the context of high yield differential and elevated prices. High beta commodity high yielders such as Aussie or Nokia are topping the cross section year to date versus lower low yielders such as yen or stocking.

If I look at a bit, my difference, G10 systematic basket, everything is sort of because Nokia and Aussie concentrated most of the positive points during the first half versus on the other side a yen, for instance. So if we look at carry, fiscal, term of trade or gross basket, all are sort of up, but it was mostly driven by long in NOC versus short in yen. So it's a bit difficult to isolate the driver during the first part of the year in G10.

Now, if I look at my, I would say top three points for the second part of the year. Further, there is no specific or predictable reason why carry should stop in FX. Yield differential are decently elevated in both G10 and EM and the gaps are likely to be maintained a bit longer due to the inflation resurgence.

The correlation with equities of the carry factor also decreased recently. But in any case, the AI team remains a strong support and the FX carry is one of the prime benefits in the FX world. I would also say like the deficits of a yielder in general are better than historical averages.

So there is no especially quality red flag or anything on that side. So still bullish on carry. My second point is that the other variables that will matter a lot, obviously, is a commodity term of trade of each currency.

It's going to be quite similar to one to the first half of the year in terms of driver, but in the currency that should be the top on the winner should be at the intersection of carry and favorable term of trade. The problem is that for 80 percent of the currency in our universe, the term of trade is primarily a function of oil prices. So with a Brent at 70 or lower, which seems to be the which seems to be a bit of a trajectory for now, which means the reversion or complete reversion of the commodity term of trade momentum for most currencies.

Best short in our view is CAD because COP or Nokia are two yielder in the universe on the long side. CE3 and INR seems quite well oriented. If we have a re-escalation to 100, 110 should be the same currency that performed during the first spike.

It's likely dangerous for high beta commodity currency in case of risk correction, but they should perform anyway over the long term. The dollar would be strong as well in that case. And for I would say more scenario of Brent was 90, which is closer to a commodity team call as they think there would be some friction even with the deal.

The difference is that in this case, the FX is clustering is not clustering into two separate blocks, importer versus exporters. The momentum is fading, but the commodity term of trade trends are not really reversing either. So this should support exporters, but also leave the room or leave the room for some strong fundamental stories, even if the currency is an importer.

In that case, I would just go for carry trade long high versus low yielder with both importers and exporters in the long. That should be the most favorable case for carry. Finally, I would say the third point would be the question of do Diem central bank, because they are hiking, will be a strong driver.

So is there going to be a question of rates trajectory and relative central bank direction can emerge as a strong driver for G10? So it's a more the right momentum strategies that I'm referring to. Our view is not really ideal.

Gaps are forecasted to stay quite elevated and carry has been dominated rates trend for more than over a year now. Like a G10 carry basket is up eight percent versus a right momentum is down minus five. If we look at our economies forecast, there is also not enough price for in Diem for rates trend or central bank to emerge compared to simply buying the differential.

That's it for me. OK, let's move on to the next continent, then heading to New York. Koenig, let's start with what's the latest on your mind.

Obviously, we wrote about how the AI team would impact FX late last year. It was a big project for us. How has that you been planning out and where do we stand on that going forward?

Yeah, thanks, Mira. Like you mentioned, we published our original AI FX framework back in November, and since then, two conclusions have really become clear to us. The first is that we now see a higher probability of a more dollar bullish AI exceptionalism outcome than before.

And the second is that the AI trade in effects appears to be evolving from just FX carry to also include other factors like growth, RV and commodities terms of trade. So touching on each of those points individually on the first piece around the dollar, the main change that we've seen over the past couple of months is that AI is increasingly becoming a geopolitical lever. The most recent episode that we saw was the US imposing some export controls around Anthropos latest models.

And we've seen some European leaders mention concerns about viewing AI more as a strategic dependency rather than just a purely commercial technology. So the way we're thinking about it is that if the U.S. continues to widen the scope of its AI control perimeter and impose more of these sorts of export restrictions, that could widen some of the divergences between the U.S. and the rest of the world and move us closer to some of these U.S. exceptionalism type outcomes that are more dollar bullish. And as a reason for that, you know, one of the things that we will be watching in second half is how the role of AI as a form of geopolitical leverage continues to evolve.

On the second point around what is the AI trade in FX, you know, in our original note, we'd mentioned that the cleanest expression was FX carry. And that is largely still true. You know, FX carry is still correlated with a basket of AI linked equities that are JP Morgan equity research colleagues have put out.

But those correlations have come down a bit. And the correlations that have risen instead on a more shorter term basis have been factors like growth, RV and commodities terms of trade. So if you put those pieces together, you know, what what specific currencies are we really talking about?

You know, on a currency level basis, the correlations with the AI equity basket is really highest for your sort of EM high yielders like Mexico and Czar and Hungary. And on the DM side, we really see it as tightest for Aussie. So that's sort of how our thinking has evolved on the AI trade in FX.

And as we move into the second half here, some of the key metrics that we'll be watching are the AI equity breadth and crowding, as well as how some of these correlations continue to evolve with FX carry and growth revisions. So, Kunj, what's the AI trade in FX? Just in one sentence.

Sure. Yeah. So when we originally published, we really framed it as FX carry.

But now it seems like it's not just FX carry, but it's a mix of carry, growth, relative value and commodities terms of trade. Those are really the factors in FX that are most correlated with the AI trade. OK, Patrick, saving the best for last now, we had Fed this week and obviously there's stuff going on in CAD as well.

So what are the main thoughts here? I think I think the Fed meeting was quite quite notable development, isn't it? Yeah, no question.

Obviously, there were a lot of questions coming in. It seemed like the market was braced for kind of a new kind of a new dovish Fed chair, you know, given all the discussion that was had in the lead up. But I think realistically, traders didn't feel like they had an edge into this.

And so a lot of people, I think, were running kind of clean books and just kind of like taking the presser as it came in. The reality is, I think it came across as much more orthodox and was expected. It was very direct about how committed they are to price stability.

And then obviously, the 2 p.m. releases were very hawkish. The thing that stood out to me was six committee members looking for multiple hikes this year. I don't think that was really expected anywhere on the street.

And when you take into the context of price stability, again, I think we I think we counted 13 mentions of that with some very blunt language in the statement. You've had some very aggressive curve flattening in our space, which really, to me, suggests that the market is embracing this idea that there is going to be some price anchoring here and that the signal is legitimate for the dollar. That is just absolutely straightforwardly positive.

And we've noted as well that the dollar was running cheap to fair value on rates models. So it was kind of like all systems go for the dollar yesterday after or during the event. And it's extended in today into today, which I think is encouraging.

You know, more broadly, looking forward, we're thinking about, you know, how do we really kind of map to the dollar on a longer term basis? And last week in our research, we we kind of put forth the anatomy of the Fed hiking cycle with kind of a few main takeaways. First of that, you know, traditionally, the Fed doesn't do shallow hiking cycles.

So like if and when they do start hiking, it's probably going to be in a minimum of seventy five basis points. Second, is it on average, the dollar run up tends to be about five percent on a broad basis in the six months leading up to the first hike. And then finally, really kind of what determines the quantum of dollar upside is, you know, the pace of the hikes and the prevailing growth backdrop more so than a rear valuations per se.

So taking that all together, basically what we see is, you know, three percent upside in the dollar. Here is a reasonable base case if they deliver on that kind of lower end seventy five basis point kind of hiking cycle. I think obviously, very importantly, a decent amount of that is already in the price.

Call it about forty five basis points in the OIS strip, leaves about thirty basis points kind of still to go. And, you know, backing out historical betas of the dollar to the rate differentials, which is about a hundred basis points of widening gives you about four and a half percent dollar upside. You know, that would imply about one and a half percent upside in the dollar.

And then you kind of factor in the value, the misvaluations that I mentioned up front, the dollar discount against rates models. And it seems reasonable that kind of like three percent is a reasonable upside target here for the dollar. Obviously not especially aggressive.

You know, you've touched about you've touched on reasons for your I think why I'm not expecting necessarily a kind of explosive move. But the kind of the kind of the kind of the kind of the kind of the kind of the kind of the combination of the fundamental rewriting as well as some valuations I do think can deliver, you know, three kind of four percent levels. And that still is material.

And I think it certainly makes sense here. So I agree with you. Yesterday seemed like a very important development for the dollar trajectory going into the second half on CAD.

Yeah, we're still we're still bearish. We have been generally since September of last year predicated on weak domestic conditions, trade headwinds and very importantly, low carry. Those are all generally still persisting in the year ahead outlook.

We laid out preconditions to even start to think about getting a little bit more constructive on CAD. And that was basically unwinding the Canada specific tariffs that are still in place and having some meaningful progress on the USMCA. Neither of those have been delivered.

So for the time being, we're comfortable to stick with kind of, you know, the bearish you on CAD with low carry, especially now that, you know, the terms of trade support, which was decent, as Octavia mentioned over the last couple of months, that is obviously actively fading as Brent trades onto the 70 handle. So pretty comfortable here, just kind of funding higher beta or higher carry pro cyclical trades out of CAD at the moment. Thanks a lot, Pat.

Well, that just about wraps it up. Bullish data, bullish dollar are the buzzwords. Please take a look at our website if you need more information.

This communication is provided for information purposes only. Please refer to JPMorgan Research Reports related to its content for more information, including important disclosures. 2026 JPMorgan Chain and Company, all rights reserved. This episode was recorded on June 18, 2026.