Global FX: De-dollarization, GBP deep-dive, DM central banks

Hello, everybody. I'm Meera Chandan, Co-Head of FX Strategy at J.P. Morgan, joined today by multiple FX strategists from across the globe.

We have Junya Tanase from Tokyo, James Neligan from London, Gunj Path from New York. So global roundup here. Look, it's been another week of the ceasefire, but no real progress made on getting the flow of oil restarted.

And this sort of keeps us in a bit of a limbo here. Energy prices have gone up again on certain metrics, but they've also normalized on other metrics. Like, for example, the gap between physical dated crude and futures has collapsed.

So that sort of removes one source of pressure. But certainly, we are starting to see some upward pressure on some things again, including things like jet fuel. And in the grand scheme of things, if I take a step back, I would say financial markets are, broadly speaking, still not pricing in any stress scenario.

You know, as you know, we remain concerned about how things will play out as we get to critical inventory levels that our commodity strategists are thinking could happen around mid-May. But meanwhile, you know, the activity data, of course, continues to surprise on the soft side. And I'm seeing this particularly in the case of Europe, where the PMI is disappointed again this week.

So, look, our basic FX approach and strategy is still the same, predominantly focused on carry, on the idea that recession will be avoided, although that remains a tail risk. So if you do get any wall shocks, that's going to be a problem. But we do think high yielders in general will be more insulated compared to the low yielders, particularly since the high yielders tend to be the exporters in the most part and the low yielders also tend to be the importers.

So we do have that dimension of carry plus exporter-importer baskets. And as you know, in DiEM, Nokia and Aussie have been our favoured, you know, favoured strategies, you know, favoured bullish candidates, if you will. And on the flip side, things like Swiss franc, yen, euro, CAD, we like to use as funders.

And, you know, we are sort of mildly bearish on the dollar here, given the general path towards a ceasefire and normalisation. But as we know, this is not going to be a great straight line path. It's going to be pretty choppy.

So instead of keeping overall exposure light there. OK, so with that out of the way, three things to focus on in the discussion today as far as I'm concerned. First, I want to focus on one bottom up interesting story, Sterling.

And we have James for that. The second is we're getting more questions on the de-dollarisation issue, particularly on sort of the treasury sponsorship of the central bank, you know, by central banks. So we'll talk about what that really means for the dollar.

And then third, we have central bank meetings, pretty active calendar next week on the DiEM side. So we go through that by region as well. So, James, let's start with Sterling.

I'm going to push you a bit on this to keep things interesting. You know, both you and I have actually been fairly downbeat on Sterling, I would say, you know, particularly versus the high yielders. It's just not a clean story compared to Aussie and Nokia.

I think you've got fiscal issues, you've got the energy importer issue, got impending political risks. And like I said, like you had this this general idea and view as well. But Sterling's in the grand scheme of things held up OK.

And, you know, you are turning a bit more constructive despite being focused on these issues. So I wanted to focus on really what is driving your change in view, you know, since I personally find it pretty hard to get super excited about about Sterling in general. Sure.

Yeah. Thanks, Mira. So, I mean, first of all.

The data that we got this week out of the UK, you know, I think we have to recognize good data when we see it. And, you know, we got a pretty sticky service of CPI print. We got a better labor market print, although there were some quirks there.

And, you know, you got a round of PMIs, which at the same time as Europe underperformed, there was some clear strength across the UK PMIs at a time where you might you might think that the Iran conflict would be having some impact. We got some decent retail sales data today. You know, I could go on.

But, you know, the upshot is you look at UK activity data surprises. They're at five year highs. I mean, this this is almost unprecedented in the post-Covid era.

And I'm not going to sit here and say the UK economy is booming. But I am going to say, you know, there's a clear resiliency there. And it does remind me a bit of 2023 when, you know, you had the aftermath of the Russia-Ukraine conflict in 2022.

Investors had a very cyclical mindset and. And, you know, including myself, actually, and. As the market transitioned to more of a carry environment, some of those cyclical shorts, which included sterling at the time, struggled a little bit, and I'm quite I'm quite cognizant of that, I can see some some clear parallels to that today.

So the data for me is quite important. And the politics we've been we've been talking about the Mandelson issue, you know, we can talk about the different candidates that might be on the ballot for the Labour Party. You've seen polymarket probabilities for Starmer potentially stepping down while they initially started spiking back in back in February.

And sterling was quite sensitive to that. We've seen that sensitivity decline quite a bit over the past few weeks. I think carry is one influence on that, but also carry in the context of what it means for the political timeline.

So let's say, hypothetically, Starmer does step down after the local elections in May. You have to think what's next. Well, we might not actually see the conclusion of the Labour leadership contest until the end of the summer.

So that's where carry comes in, because investors would obviously have to forfeit that carry if they were bearish on the politics to, you know, as they weigh up, you know, whether it looks like we could get one candidate or the other. Obviously, there's going to be some market friendly candidates potentially on that ballot as well. So we won't know likely over the summer.

And that's just going to mean carry is, you know, you're going to forfeit that you're going to forfeit the accumulation of that if you're bearish sterling. So I think that matters as well. And, you know, if we are in a carry world, then rate spreads matter more.

And you look at some of these pairs like sterling stocky and they are quite dislocated. You know, and I think some of that again goes back to that point that some investors are still in a cyclical mindset rather than a rather than a carry mindset. And, you know, potentially you could see some positioning migrate over.

Talking of positioning, the market is the wrong way round for this. I think it's probably not as short sterling as it was, but I think the market is still still short sterling. So if if if there's a bit of a realisation around the political timeline and what and how carry impacts that, as well as the data, you know, there's a real shift in the data this week.

I think that can matter for sterling. So. And how do you think the BOE is going to deal with things next week?

Yeah, so, you know, I think they've kind of set their stall out in terms of the guidance. Obviously, we saw some pretty aggressive shifts in market pricing as the conflict broke out. You know, at one point we were pricing for hikes for the BOE this year, which to me looked wrong and, you know, still would be wrong if it was I think if it was priced this this year today, because you obviously you have to think about demand destruction.

And we saw Bailey pushing back on that saying, you know, on several occasions saying that they're going to take a more cautious approach, wait for developments in the conflict. And so that constrains them, I think, next next week in terms of any significant hawkish outcome. But, you know, the market is aware of that and, you know, we're not pricing anything for the meeting as a result.

But, you know, I'm just watching in the minutes if there's any kind of the more centrist voters that might hint that, you know, the recent UK data could mean that if, you know, if there weren't a conflict, then there would be kind of increased pressure to hike rates. I think that's, you know, potentially could see some hawkishness in the minutes. But on the vote, you know, we're expecting a 7-2, you know, there's potential risks of, say, 8-1 or 9-0, which is, you know, it is a dovish risk.

But I don't think Sterling would be massively surprised by that because we know that the Bank of England told us that they want to wait and be cautious anyway. And obviously the forecast will be in focus, you know, about a very sticky CPI print this week. You know, we think that the peak in the inflation profile is going to be around three and a half percent.

That speaks to a little bit of the stickiness there. You know, you could see Sterling reacting if the forecasts are a little bit more on the hawkish side. The guidance overall in terms of, you know, willingness to act will probably stay the same.

But, you know, I think for me, for Sterling, it's going to be are there any tidbits in the minutes around, you know, lean hawkish or is there something hawkish in the forecast? Those are the kind of areas I'm going to be looking at. And then potentially some marginally dovish risk from the vote.

But do you agree that the more constructive Sterling is not the same kind of intensity as, say, Norway or Australia? Yeah, I would agree. You know, I think there's still a case for Sterling to lag those currencies because you do have some lingering uncertainty around around the politics.

You do have that energy importer status. So, you know, I still think pairs like Sterling-Nokia can grind lower, but it's it's really Sterling versus the lower yielders where we've we've shifted stance a little bit and where valuations are a bit more attractive. OK, thanks a lot, James, on Sterling.

So let's let's move on to the next topic now. And, you know, I wanted to focus a bit on this question that I keep getting on de-dollarization, particularly in light of the central bank, you know, holdings of treasuries falling. Two things to flag on this dollarization story.

The first thing is, if you look at equities, there is actually no South America moment. It's going the other way around. The relative equity returns for the US is actually outpacing the rest of the world.

And I see that particularly to be the case versus the eurozone. If you look at the flow data, the Steinway, even from our, you know, equity strategist, for example, what we're seeing is that net net the inflows into both the US and E.M. actually have stayed fairly resilient. It's Europe.

That's the laggard. So that's not, you know, from a cyclical perspective, I suppose the main point is that there isn't really any sort of South America moment here. The bond market, I think, is slightly different.

You've got treasuries. It's hard to ignore, really, that the custody, treasury custody holdings of the Fed have declined to their lowest since 2012. That's continued, you know, the last few weeks.

The share of dollar in FX reserves from the IMF coffer data, as we flagged before, also, you know, had fallen further. I guess to me, it's a two part question. Is this meaningful for the dollar, both in the near term and in the longer term?

And I suppose as far as the near term impact is concerned, I should just say that, you know, at least the latest bout of selling in treasuries that you got, or at least the reduction in holdings has actually coincided with rising stresses in the system relating to energy prices and initially the stronger dollar. And that's not really unusual in this time. Hasn't really prevented the dollar from strengthening at the peak stress periods, though.

And that's typically what we see. So, you know, that's something to keep in mind. And, you know, the second thing to keep in mind is that as far as the near term impact is concerned, you know, if you take a look at what measures of balance payments, the financial accounts actually are the most correlated with the dollar.

What we found is that, you know, the tightest correlations are actually with net FDI inflows. It's not about net equity inflows. It's not at all about the debt portfolio inflows as well.

It's really more about the FDI, which is sort of the stickier impact. So near term, I don't really view this as a headwind for the dollar because, you know, these kind of episodes, you know, can be quite typical in periods of stress. It doesn't really change the fact that, you know, we have been seeing that the share of dollar and FX reserves overall has been declining.

But that's been a 10-year phenomenon. It's not something that's changed, I would say, substantially in the recent quarters from trend. The second thing I'll say is that, you know, there are longer term factors to be considered here, and that could be around potentially what happens if and when U.S. resiliency runs out of steam and, you know, what sort of dollar weakness do we get when the Fed eventually starts to cut if, you know, there is reduced reserve sponsorship.

And that is a question we need to think a bit more about and do a bit more work on. But certainly, as far as the near term is concerned, I think what you're seeing at the moment is very much, you know, not really having much of an impact on the dollar from this de-dollarization issue. So with that, let me move more to the central bank story.

I guess we've discussed the BOE already. Kunj, maybe we can talk about the Fed and the BOC now. And also, is there anything new on the USMCA side for the Canadian dollar that we should keep an eye on?

Yeah, thanks, Mira. We can start with the Fed. So, you know, we do think the Fed next week should likely be a non-event for the dollar.

The market's already not pricing much for the Fed through year-end 2026. There is still the ongoing uncertainty around the Middle East and no SEP or DOTS at this meeting. We think actually the bigger storyline here could be around the idea that, you know, this is potentially Chair Powell's final meeting.

And given some of his past commentary around potentially staying on the board even after his term as governor ends, you know, any further clarity on that side of things actually could be the most important takeaway for the dollar here, especially given some of the logistical hurdles still facing incoming Fed Chair Kevin Warsh regarding his congressional confirmation. So on the Fed, that's sort of the main angle that we're watching it from for the dollar. For the BOC, we don't think next week's decision is likely to be a major driver for CAD, but we do see risks in a CAD bearish direction at the margins.

So the BOC widely expected to hold its policy rate for the fifth consecutive meeting, still facing the uncertainty around the Middle East as well. And higher oil prices have boosted the energy sector but have otherwise been a drag for the rest of the economy. You know, there are updated forecasts being released, which we think are likely to be revised in a stagflationary direction with growth lower and inflation higher.

And our economists have been flagging that they think the BOC is likely to view the weak growth as the larger concern here. One other interesting wrinkle is that the BOC has already flagged the upcoming USMCA renegotiation as a big unknown and kind of a CAD, Canada-specific downside risk to the outlook. And to that extent, we did have some incoming headlines this week from both USTR Greer and Prime Minister Mark Carney indicating that the US and Canada still remain far apart on negotiations.

So, you know, our baseline here is that we do think the Bank of Canada remains on hold next week and all the way through year end. But if we're talking about the distribution of risks here, we do think that risks are skewed towards eventual BOC easing, even if the tone next week is neutral, given some of these downside risks that we mentioned. So, with the market still pricing around 35 basis points of BOC hikes in 2026, we do see scope for some of that to get unwound over time, which could prove CAD bearish at the margins.

Thanks a lot for that, Karanj. So, ECB, look, no policy changes expected. The market, after pricing at almost two-thirds chance of a hike, has stepped back.

And nonetheless, I wouldn't say that this meeting's a non-event. I think it's going to be quite important. In the grand scheme of things, the forecasts have been hawkish.

The survey data that's come out even this week, for example, is showing pretty firming inflation pressures. But then equally, growth data is disappointing. The PMIs were weak as well, you know, for growth.

And we got another growth downgrade from our economists as well. So, overall, you know, the question is, how is Lagarde going to really manage this? ECB communications have been a bit hard to discern because they've kind of gone from first focusing on the inflation narrative and then, you know, Lagarde in her latest communication suggesting a more data-dependent approach.

So, we'll have to see what truly, eventually, she ends up sticking with at this meeting. So, I think that's going to be quite an important thing to focus on. What exactly is it that they're going to be prioritizing and how much?

What I'll just say is that, you know, in the event we do get a hawkish outcome, I really wouldn't be looking for euro strength, any euro strength on the back of that, to be sustained. Because at the end of the day, I think the underlying dynamics for the euro have softened a fair bit. You've got the relative equity returns that, you know, that are lagging pretty substantially versus the U.S.

The growth metrics are lagging. Relative carry is also more, you know, is a bit of a drag. And if over and above that, in addition to the energy price shock, what we're getting is higher interest rates as well.

That's not really a great growth picture. So, I would be pushing back against the idea of euro strength and my preference is still to use euro as a funder for other high yielders. So, with that, let's focus on Japan.

Tanase-san, what are you thinking here in terms of BOJ and what are the balance of risks going into next week? Yeah, thanks for the question, Mira. So, actually, unchanged policy rate next week is broadly expected.

And market expectation for that next week's hike has been declining to a unique country and now pricing only 5% probability of a hike. But I think it may be somewhat risky to dismiss next week BOJ's meeting as a non-event. In other words, even if BOJ holds as expected, it could still move yen.

And actually, it may not be so easy for the BOJ to make next week's meeting as a non-event. It is a more delicate task than that many persons are thinking about and will likely see some short-term volatility surrounding that BOJ rate announcement. Given the current setting where Darien is trading a key level at 1.60, the BOJ is likely to be very careful to avoid the pre-reproduction of September 2020 and April 2024 episodes, where the damaged BOJ communication triggered the sell-off in Japanese yen, forging the move to conduct yen-buying intervention.

From this perspective, in addition to regular statement and Governor Ueda's press conference, the boat split and economic outlook in the outlook report will also be in focus. If BOJ is unable to deliver enough focus message using these factors, yen could weaken further after the meeting. Also, depending on how Darien moves over the next few days, the probability of the BOJ rate hike could change significantly.

So, if Darien rides into the 1.60 or the 1.61 by next Tuesday, the probability of a hike should be much higher than that 5% where now has a market pricing in. If the BOJ surprises the market with a rate hike, it is likely to see other knee-jerk yen buying. This is because I think that we will see some short-term volatility around the next week's BOJ meeting.

Finally, I would like to talk about MOF intervention probability. We continue to think that MOF would step in the market before Darien reaches the cycle high at 1.62. So, this is because even if Darien approaches 1.62, they do not come in the market.

Market participants may interpret it as a weaker interventionist stance, and it will be seen as a green light for yen selling. So, a relatively strong tone in the finance minister, Katayama, recently also suggested that intervention may not depart from here. That's from me.

Thank you. Thank you very much, Junya. So, that's it.

That's it for today. Thank you very much, listeners, for joining us. This communication is provided for information purposes only.

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

All rights reserved. This episode was recorded on April 24, 2026.