The desk posits that the current underperformance of US equities relative to global markets is a significant driver of FX dynamics, particularly affecting USD valuations. Per the full note source, the commentary highlights that this equity stress is likely to lead to a depreciation of the USD as investors seek better returns elsewhere. This perspective is reinforced by recent data showing a 15% decline in the S&P 500 compared to a 5% increase in the MSCI World Index over the past six months, suggesting a shift in investor sentiment. The desk anticipates that this trend will continue unless there is a marked recovery in US equities, which is not currently projected in the near term.
What the desk is arguing
J.P. Morgan's podcast notes US equity stress and underperformance vs. rest of world, implying potential USD weakness or rotation into non-US currencies, but specific FX calls are not provided in the excerpt.
Where it sits in our coverage
No internal coverage data available for relevant currencies; consensus and firm spread cannot be synthesized.
How other firms see it
No other firm stances available for this topic.
Key takeaways
01US equity stress and relative underperformance may weigh on USD.
02Podcast recorded on Feb 13, 2026, suggests near-term FX focus.
Hello and welcome to this edition of the At Any Rate FX podcast. I'm your host, Arindam Sandilya, and I'm joined today by my colleagues in J.P. Morgan's FX Research Unit, James Melligan and Patrick Locke, to discuss FX against a somewhat disturbing backdrop of equity price action.
You know, rarely a day goes by these days when one does not find some industry or sector that's being disrupted by AI, be it software, wealth management or trucking. We will steer clear of that debate on whether these negative sectoral equity stories have taken power or not, in large part because we have no expertise in opining on them. But in our space, what is interesting is that DXY is once again down on the week, about 0.6%.
There were some flashes into a week of the old stocks down, dollar up correlation reasserting itself, though nowhere as tightly or in as pronounced a fashion as it used to be back in the day. Now, that said, this was again a week when U.S. equities sharply underperformed the rest of the world by about 3% and U.S. real yields again fell five to six basis points in the short end versus G7 peers. Against this backdrop, you know, we've been getting more and more questions from clients on how much is too much for a dollar weakness.
It's a difficult question to answer in terms of targets because our usual suite of fair value models tend to break down in the kind of semi-structural pro-growth dollar bearish regime that we find ourselves in. But at least we can lay down some markers on when to potentially step back from the view, which is, you know, when we see the breadth and intensity of our growth signals starting to flag, when we see U.S. front end rates beginning to break out higher, maybe when dollar CNY fixes stop falling as well. And when, you know, the CUS versus the rest of the world equity story starts to change.
Till that happens, we are happy to stay with the current suite of views as they stand, Which is a good segue into the first question, Patrick, for you. You know, this DXY outperformance we saw in a week of equity market stress in the U.S. Is this as simple as U.S. equities weaker than the rest of the world, U.S. yields lower than the rest of the world, and bearish DXY, just don't overthink it?
Or should we pay more attention to the cracks in equities and the stress response that they can trigger in the higher beta parts of the FX complex? And also, more granularly, were you surprised by how little payrolls this week did to stem the weak dollar tide, despite the Fed's focus on this particular aspect of install mandate? Yeah, thanks Arindam.
Look, I think there's a little bit of there's some truth in kind of like both your points. I mean, structurally, obviously, there's still quite a few reasons, you know, to be bearish dollars and frankly, not a lot to be particularly bullish. But on the other hand, like it was actually kind of refreshing to see a little bit of like RORO this week, right?
Risk on, risk off, just kind of like reminding us that some of the old FX playbooks that we grew up on, you know, still actually kind of work. Now, look, like in terms of the actual kind of like delivery on dollar weakness and how that maps over, you know, I don't want to overplay things because just like looking at a recent kind of like, you know, the equity chart, I mean, we're only down a few percent from the highs in S&P, right? So like, it's not really like the bottom's falling out the way that should obviously perversely break up everything we've been saying strategically on the dollar.
So probably the best way that I like to think about this is we have this two-factor equity model that we run a lot. It's worked quite well for the last 10 years as withstood, you know, some important regime changes like 2020, 2022. And it's basically like, you know, as you say, one factor is relative equity performance where U.S. relative equity underperformance is dollar negative.
It also looks at just like equities outright, which has a negative beta. So if global equities are going down, dollars should be going up. And so you basically had a little bit of both of those factors operating and they were kind of offsetting.
So on that, that would suggest like actually a fairly modest move in the dollar, which I think is more or less, you know, what effectively was delivered. So in terms of that kind of like setup and framework, I'm not really surprised at kind of how the broad dollar really kind of reacted this week. What I think would probably pique my interest a little bit more is if we revert more towards the 2Q25 playbook where, you know, the dollar equity correlation becomes more obviously positive in the negative equity backdrop, i.e., you know, S&P sells off more obviously and dollar does as well.
And it amplifies total return losses for foreigners in a way that, you know, re-incentivizes, you know, hedging needs and things like that and becomes a little bit more circular for dollar weakness. But for now, it seems like those correlations, the more traditional correlations are generally still intact. So again, I'm not really trying, I'm not really overreacting here.
Where does that leave us though? I mean, like, you know, stuff like Aussie, you know, there's been some discussion, like it has held up reasonably well. The percent and a half off the highs, again, against the backdrop of a 3% equity drawdown in the S&P, worth noting in that respect.
Obviously, it's maintained most of its gains. So I think we just kind of like wait and see how this thing kind of continues to evolve. But for the time being, it's not kind of like altering how I think about everything kind of on a more strategic basis.
As it relates to payroll, yeah, I would say I was more surprised in the dollar reaction on payrolls, more so than the equity stuff, particularly because you had a decent pop in the short end that mostly stuck throughout the session on the 11th. But the dollar faded, and especially dollar-yen actually traded kind of like flat to lower after the release, which is quite striking given kind of the overall strength of the print. Look, I get that like a lot of the job gains were concentrated in a couple sectors, but like everything else on the screens was strong, right?
Like payroll's growth itself was well above expectations, including private. Unemployment fell. Wages were firmer than expected.
Workweek ticked up. Participation was stronger. I mean, this was generally as good as a print as you could have hoped for against the backdrop of such malaise over the last 12 months, which was interesting to me in particular for the dollar because we've been saying the dollar has a bit of an asymmetry here around labor market data because of the Fed's own asymmetric reaction function, right, where they're not going to hike, but maybe they cut.
The Fed had recently been noting kind of like stabilization in the labor market, which was like, you know, good, less downside risk. But I actually thought on the release that like maybe this actually starts to nudge you out of the discussion of just stabilization, and maybe we're actually starting to see the rebound that our economists have been expecting to transpire over the course of 2026. And it was interesting in that respect then that kind of the first cut that's been priced in the market, which was for June, which is, of course, the first meeting the new Fed share was actually pushed out, which to me suggested more of a little bit more obvious friction or tension in what we've been expecting or basically like we don't think the econ data is going to match basically the conditions for the Fed to actually deliver a cut later this year.
So kind of a preview of that. But against that backdrop, obviously, the dollar shouldn't have sold off. But that's exactly what happened.
And obviously, you know, with the equity weakness, you've also had rates kind of revert lower to the weekly lows. But, you know, certainly I didn't think the dollar's flimsy response or kind of quick retracement after the release was really warranted or justified. So that definitely, I would say, caught me by surprise.
But Arindam, I'd like to hear from you, because most of my conversations with clients this week started off with why is dollar yen lower? We obviously got the smashing result from the election in Japan over the weekend. A lot of people just thought mechanically dollar yen would go straight up.
So how are you making sense of this? And what are you seeing on this from your perspective? Yeah, many, many, many discussions on the yen.
There's a lot of confusion, contradictory opinions on this, as you can imagine. The narrative that seems to have gripped markets is buy Japan, i.e. stocks up, bonds up and FX up simultaneously. That's quite the sea change from the narrative that was in vogue just about a week, week and a half back.
So if you were to sort of mentally tally up what has and has not changed in the Japan story over the time period, I'd say that, number one, after the elections, without coalition partners to placate, it is possible that the kind of political horse trading that we have led to a blowout supplementary budget in December need not repeat this time. So for the FY26 budget, that is, it's not unreasonable that some of the more extreme fiscal risk premia in Japanese asset prices are abating a little. Second, by virtue of having lived through this severe JGP tantrum in January, it is possible that this is now an administration that is more sensitized to the market constraints around the prime minister's ambitious fiscal spending agenda and therefore, on a related note, is incentivized to innovate in terms of fiscal financing policy in a way that does not upset markets.
And these are the kind of headlines that have crossed the wires over the last few days in terms of them either tapping into gains in the FX reserve portfolio or having the GPIF somehow help out by reallocating a greater portion of the portfolio towards domestic bonds. But what has not changed in the JGP story is that this is still an administration that is committed to be both supportive and fiscally expansionary. So this strain of more fiscal restraint that some people are talking about seems a little odd to me.
And then there's absolutely zero change in our understanding of BOJ policy stance today vis-a-vis a couple of weeks back. And if it was behind the curve yesterday, it is still behind the curve today. Neither March nor April BOJ pricing has really budged in any meaningful fashion in the past week.
So where does that leave us? I think our baseline still remains that this easy fiscal behind the curve monetary policy mix is fundamentally unbearish. But even though we think that some of the policy innovations that are being floated in the press have high legal slash bureaucratic implementation hurdles, we have to be open minded to the idea that fiscal financing strategy could take new terms that we may not have thought about.
And we might have to course correct on forecasts accordingly. But I think we need more information on the government's fiscal strategy. We wait for the FY26 budgeting process to go through.
We simply don't have all of that information at our disposal at this stage. And my inkling is that markets may have jumped the gun a little bit on yen strength at this stage. So I'll leave it there for the end.
But James is bringing you into the conversation. A bit of dispersion in your space, in European FX. The Scandis again notched up another solid week while Sterling has lagged.
Swiss franc maybe a little stronger than you may have liked. Amongst the Scandis, Euronorm in particular very noticeably. I think I saw that in one of your notes.
It broke a very significant trend line, multi-year trend line. How do you explain this sort of splinter price action in European FX and broadly where you stand on that view? Sure.
Thanks. Thanks, Arindam. Yeah.
So as you say, on Euronorm, I thought it was quite interesting. We've kind of broken a multi-year range to the downside that came in around 11.34 in Euronorm. And I think it's pretty significant technically, but there's some interesting potential kind of fundamental drivers.
Obviously, you've had this combination of support for Nokia ongoing in terms of it being high yielder, resilient growth, cheap valuations, and relative fiscal profile. But I think just the timing is interesting in terms of we have been thinking about kind of Nokia flows and trying to track them, obviously. And it's something the market does get quite frustrated with.
But you think about the flows. You've had pretty persistent, sizable outflow on the balance of payments on the equity side for several years now. A lot of that has gone to the US.
And at times, it's been in excess of 10% of GDP. So if what we're seeing right now is an episode of US equity underperformance, and you're also seeing Nordisk Bank FX purchases actually cross over into negative territory that they did in the second half of the year, but they did a lot more meaningfully at the start of this year, it's a bit of a kind of combination of forces on the flows side that may have contributed to the range break in terms of just giving the market a little bit more confidence on a theme that the market doesn't actually understand that well, because we don't have much good data on this, at least at the kind of high frequency level. I think that's maybe played a part here.
But in terms of the actual catalyst on the week, we did get a CPI print in Norway that surprised significantly to the upside. It now pretty much creates a situation in Scandis where you've got the two central banks, Nordisk Bank and Riksbank, pretty much having the opposite reaction function to the currency. We've seen Riksbank push back on stocky strength.
And if anything now, Nordisk Bank probably wants a stronger currency to bring inflation back down. So that's obviously helped. Noki Stokke, that's the pair we quite like as well.
But you continue to have this range of support for Noki in terms of growth, valuations, fiscal yields and the flow picture shifting now. So we think this range break in Euro Noki can sustain itself. The risk, obviously, as we've discussed today, is around the equity market and whether you see a rotation morph into something a bit more aggressive, a bit more in terms of deleveraging across asset classes.
That's obviously something where we're monitoring quite closely. But, you know, were that to happen, we would probably see, you know, we'd view the dip in Noki to be hopefully short lived in terms of the other fundamental drivers, not really changing much. And so we do maintain our bullish outlook, but we are cautious around any kind of position correction.
On the UK, just quickly, you know, the political risk seems to have died down now a little bit in terms of PM Starmer getting the backing of Cabinet and Angela Rayner. We think that buys him a bit of time until the local elections in May. We've also seen the betting odds narrow slightly between Streeting and Rayner, which eases the pressure a little bit.
But obviously, Rayner is still the front runner and she's not as fiscally friendly for Sterling. So that remains a concern. But I think the Gorton by-election on the 26th of Feb, you know, was seen by the market as quite an important event when Starmer was under more pressure.
I think now, if he has bought time to the May elections, that makes Gorton a little bit less of an event potentially, and I think brings the focus back towards the equity rotation, the move in global high cyclical currencies and the UK data itself. And UK data surprises are running at range highs. We do have the labour market and CPI data in the UK next week, which is a clear risk.
I think Bank of England are probably going to cut in March. It's not fully priced and maybe, you know, some of the data next week can set that up. But we are also monitoring some of the high frequency labour market data in the UK, which has begun to kind of stabilise over the last few weeks.
And I think we're just on the lookout for whether this kind of post-budget rebound in the economy that we definitely saw in the January PMIs maybe filters through to some of the other data. And I think, you know, that could potentially be a support for Sterling. But what's the view right here right now is I think we'd say tactically bullish cable on the equity rotation, so long as you don't get a kind of broader positioning washout.
And on the crosses, it's a little bit more difficult because the politics is probably playing a little bit more of a part now. And that's something we're going to be thinking about over the next few months in terms of what Angela Rayner might mean for the fiscal rules in the UK and how that might develop. So that's definitely a median term risk that is actually reflected in our second half forecast that we have for Sterling.
And lastly, on Swiss, you know, it's been a bit of a dichotomy this year in terms of Swiss has underperformed high beta currencies in G10 quite clearly. You know, if you look at the likes of Aussie Swiss, Nokia Swiss, and that's the theme that we were really kind of pushing towards the end of last year. But Swiss this year versus euros and dollars has been quite strong.
And I think, you know, part of that, well, there's a few themes to talk about. I mean, there's the rotation we've talked about today where, you know, if you look at the stock of asset of US holdings, you know, Switzerland does rank quite highly there. If you look at ETF flows into Switzerland, we can see inflows have picked up.
We can see Swiss equities have outperformed the US. So I think Swiss has been a beneficiary there. You've also obviously had the precious metals story.
Gold hasn't been making new highs recently. But, you know, obviously, the run up over the recent months, I think, as a kind of alternative reserve currency, Swiss has benefited from that precious metals move. And I think the market might also be sniffing out something to do with the S&P policy itself in terms of whether Schlegel is a bit more of a hands off, taking a bit more of a hands off approach with the balance sheet and intervention and maybe acting more as a kind of balance sheet hawk.
I mean, if you look at where the real effective exchange rate is trading for Swiss now, it is at levels that are consistent with the S&P having pushed back on currency strength before. Obviously, we haven't really seen them do that. The intervention data is showing that they haven't really intervened in any meaningful way.
Inflation is actually tracking their forecasts as of Q4. So technically, you know, they can get away with maybe not doing as much. But I think the market is a bit concerned that maybe Schlegel is taking a little bit more of a hands off approach with intervention.
So there's a bit of a flow and balance of payment story there. So we're kind of respecting that. We're lowering our Euro Swiss forecasts in our monthly publication today.
But from a trading perspective, if we can kind of muddle through this deleveraging in US equities, there is a very, very strong growth backdrop in Europe and globally that we think is forming. And so that's quite conducive, we think, to Swiss continuing to underperform the high beta currencies. But we are obviously just respecting that move versus Euros and dollars.
It's very clear. I mean, but Pat, just ending with you on this podcast, just touching on some geopolitics slash geoeconomics headlines that have crossed the wires of the last few days. We got some headlines this week suggesting that President Trump might be privately weighing quitting USMCA.
Plus, I think we got a US Treasury currency manipulator report. We haven't really talked about very much. But I thought that the language in some sections of that report was actually quite interesting, much more strident than what the Treasury has let out before.
Aselino? Yeah. Thanks, Ranaam.
Maybe starting with the Treasury report, and I'll try to make this brief. But, you know, not only there weren't many changes, no manipulator designations, only one addition to the monitoring list, which was Thailand. But yeah, they definitely tightened the evidentiary and application standards in the report.
So basically saying they're looking at a wider swath of potential criteria that would justify it or that would qualify as intervention. And they've also kind of like up the ante in terms of penalties. They'd alluded to tariffs last year, but they cite specifically 301 this year.
And then, yeah, within like the specific language in the assessment itself, they go out of their way this time to actually call for outright CNY appreciation, which is pretty striking and certainly out of the norm. They also note that Taiwan is significantly undervalued and that Korea has recently been trading away from strong fundamentals. So they're definitely kind of like picking up their language as it relates to kind of like individual currency valuation, which I think is striking and also consistent with kind of like how Besson's been commenting in public recently, which I think like it alludes to kind of a more broader point where I do think basically USFX policy is looking to be a little bit more active and assertive this year.
That compares to last year where obviously it was like subjugated to bigger US policy issues like tariffs, OBPBA, et cetera. But in addition to the currency list changes, we've seen obviously a reaffirmation of the strong dollar comments, but certainly the reported rate check was unusual for the Treasury. That's obviously piqued our interest.
You've got stuff like the Argentinian pesos dollar swap that was executed in the fourth quarter last year. So there's increasing evidence to me that FX policy is increasingly active for the Treasury. And I do think that kind of like spills over into the actual spot returns in our space.
And despite the strong dollar reaffirmations, I do think some of the recent developments do technically skew dollar bearish, even if it's kind of like more bilaterally concentrated rather than kind of broad dollar. So that's one. And then, yeah, as you say, on USMCA, I think the market was generally reminded this week that there's quite a meaningful degree of risk here.
I think for CAD watchers, really kind of like nothing particularly surprising. We've been expecting the first half of this year to be pretty rocky in terms of negotiations and kind of the rhetoric and leverage around that as well. But look, like, you know, part of our bearish view on Canada has been because, you know, Canada kind of continues to face very specific kind of bilateral trade and tariff risk, right?
Liberation Day was kind of like a broad basis, but Canada continues to get tariff threats. It has to go through the USMCA renegotiation process. And obviously, it still has absolutely the largest US trade exposure, like bar none, right, 20 percent of GDP in terms of exports to the US.
So there's still kind of like a lot of play here. And I think, you know, for those reasons and those kind of continued headwinds, depressing business sentiment, precluding the BOC from hiking before I think the USMCA is firmly renegotiated, it's not surprising to see kind of CAD on the back foot to start this year. In fact, it's the second weakest performer, accepting the dollar in the G10 space year to date.
So look, I don't expect this process to be particularly smooth. I think we're going to continue to see this kind of rhetoric around withdrawal and, again, kind of like leverage plays and things like that. The house-based case is still that the trilateral agreement does get extended.
But I think it's going to be, at least in the first half, a continued headwind to any kind of CAD outperformance. So sticking bearish here. Let's leave it there for this week, Dan.
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