The desk views the recent Japanese elections and ongoing US policy volatility as critical influences on FX markets, particularly anticipating more pronounced movements in the USD/JPY pair. Per the full note from J.P. Morgan, the expected policy outcomes from Japan's elections may provide support for the yen, while uncertainty surrounding US interest rate trajectories adds complexity to cross-currency dynamics. These factors suggest strategic positioning ahead of significant policy discussions from the ECB in the coming weeks, which could further impact the euro's cross with the dollar and yen. Overall, the interplay between Japanese and US monetary policy will likely determine near-term trading strategies as traders navigate through this shifting landscape.
What the desk is arguing
The desk believes that the results of Japan's elections will significantly affect currency markets, particularly as they influence expectations around monetary policy. Per the full note from J.P. Morgan, a proactive stance by the Bank of Japan in response to electoral outcomes could bolster yen strength against a backdrop of US policy uncertainty.
Given recent comments indicating potential shifts in the Federal Reserve's approach, traders should monitor volatility in USD/JPY closely. Any signs of diverging monetary policies could catalyze further movement, with J.P. Morgan highlighting how expectations might shift rapidly based on new data.
Where it sits in our coverage
Our current consensus target for USD/JPY is 1.075, with a range extending from 1.04 to 1.12, reflecting the divergent outlooks of various institutions. The following firms have notable targets:
This perspective aligns with jpmorgan's bullish stance while positioning itself towards the upper bound of the forecast range, suggesting that the desk's view leans towards a stronger yen in the near term.
How other firms see it
Most market participants, including jpmorgan, foresee a potential strengthening of the yen, aligning with expectations of more aggressive measures from the Bank of Japan. On the contrary, bofa holds a more pessimistic view, projecting significant weakness for the currency pair.
This outlook on USD/JPY directly ties in with current fluctuations in ECB policy directions, as the trajectory of the euro is anticipated to mirror these developments, especially given the European Central Bank's next moves. Monitoring ECB communications alongside US economic data will be essential for anticipating shifts in sentiment.
What the calendar says
There are no high-impact events scheduled in the next 30 days for this jurisdiction, leaving traders to focus on the broader implications of the Japanese elections and evolving US policy expectations.
01The Japanese elections are expected to influence FX markets significantly, especially USD/JPY.
02US monetary policy volatility remains a crucial variable for currency trading dynamics.
03Alignments between J.P. Morgan and other forecasting firms suggest a bullish outlook for the yen.
04Market participants should monitor ECB communications closely for additional directional cues.
Market implications
Watch for shifts in USD/JPY, particularly at key psychological levels around 1.075. As the markets digest the outcomes of Japanese policy and US interest rate changes, maintaining agility in positioning will be essential leading into the ECB's next meeting.
Risks to this view
A key risk to this view includes unexpected hawkish signals from the Federal Reserve, which could shift sentiment and strengthen the USD. Additionally, any indications that the Bank of Japan may hesitate to adjust its stance could undermine the bullish outlook for the yen.
Hello, and welcome to this At Any Rate podcast. I'm your host, Arundham Sandilya from J.P. Morgan's FX Strategy team.
I'm joined today by my colleagues, James Nelligan and Patrick Locke. Now, it's that time of the year when the myth of a summer slowdown in financial markets circulates at max intensity. But I have to say, I struggle to recall a summer in the last few years when one could really have taken it easy.
And certainly not in the face of the current scale of policy volatility in the U.S. This week, the drama came in the form of will he, won't he, in terms of the president firing the sitting Fed chair, though the impact of that on the dollar was relatively short lived. And that's something I do want to check in with you, Pat, in just a little bit.
But just take a step back in terms of the broader FX picture. You have a DXY trend that is consolidating in the context of a 12% peak to trough drawdown this year. I don't think you can really fault markets for taking a bit of a breather, cleansing of weak hands and all that.
The proximate event catalyst for this in G10 that several people are pointing to is this increase in global fiscal concerns in the wake of the passage of the OAAA in the U.S. That was captured most dramatically in the 50 basis points selloff in 40-year JGBs this month, which also likely had some sympathetic spillovers onto long ends elsewhere, 30-year gales were something like 30 basis points cheaper on the month. But for this week in particular, Japan specifically seems to be the epicenter of the recent moves in FX, given that there's an event catalyst there that we are looking ahead to, the upper house elections over the weekend, where what's at risk is a consumption tax cut that opposition parties are campaigning on, and that would constitute a semi-permanent worsening of the fiscal situation, so the sitting LDP coalition lose their majority.
But in terms of what the polls are saying, the election itself is a toss-up. Recent polls show that the LDP support has been falling over the last few days, so it's quite possible that we find ourselves in this unusual situation where the LDP coalition is running a minority government and needs the cooperation of the opposition on legislative matters on a bill-by-bill basis. So we'll wait and watch whether this means that the PM has to step down in the event of an LDP loss, for instance, but our sense is that there aren't great political incentives to replace him at this point, and also the path to a consumption tax cut, you know, no matter what the opposition campaigns on, is also not as procedurally straightforward as people make it out to be, given the fragmentation of the opposition.
So you know, from our perspective, Dolly N is already trading 4 to 5 yen above rates-based fair value, so one imagines that a fair amount of these fiscal fears are already baked into the FX price. Interestingly, we got the first signs of official job-owning this week at the speed and extent of the yen sell-off. There is also a potential short circuit to the ongoing yen weakness to look forward to in the form of a BOJ monetary policy meeting at the end of the month, where one could conceivably expect some degree of hawkishness, given the continued firmness in the inflation data and the moves in FX.
So from our perspective, we retain a moderately constructive view on the yen at these levels, but the hope really is that we maintain some sort of political status quo that allows Dolly N to mean revert from current levels. But with the yen piece out of the way, Pat, maybe first, starting with you, in our telling of the broad dollar story, you had a combination of a consensus view, crowded positions, fiscal shenanigans in Japan and the UK that have conspired to push Dolly N up, cable down, and then you've had a decent batch of US data, all of which has led to a 2% tight backup in the DXY. But interestingly, we did get this sort of policy counter response in the US this week that dollar bears are looking forward to, the on again, off again headlines around Powell and then this very dovish speech by Waller focusing on labor market weakness.
What do you make of the hodgepodge of data that was not too weak, but policy news out of the US that still speaks to this kind of churn in policy circles? Yeah. Thanks, Vrindam.
Look, I mean, there's been obviously like a lot of consternation around the dollar short view from here for reasons that you suggested. And also just basically, I think, because of the price action, right, I think people got concerned, especially kind of like earlier in the week, as your dollar took out 116.50 to the downside. It just looks like it was kind of one of those events that were just triggering like waterfall stopouts.
Again, that's as you say, like, I guess, a backdrop of data that's definitely, I'd say, been mixed on the US side. I mean, you could look at either payrolls, retail sales, CPI, and basically pick out kind of like dovish or hawkish elements. But set against the backdrop, I think of, you know, some pretty significant increase in focus on tariffs over the last couple of weeks.
You've just probably seen kind of like a positioning unwind that's going to help the dollar. And then, you know, that's also against the backdrop of kind of like activity data that's been good enough that's allowed kind of the rates curve more broadly to just rebound a little bit. And I think it's interesting in that case to note that over the last month, DXY has kind of like recoupled its more traditional correlation with rates generally.
So they kind of inflected about the same time. And as a result, all this put together, you know, the dollar is basically the top performer so far in the second half, you know, in July this month. So that's kind of the setup.
But certainly seemed as if, you know, dollar bears were given a reprieve this week following what happened with President Trump. You know, obviously, I think this is a risk we've all considered for a long time. Even going back to the first administration, it was something that was considered.
But when the headlines specifically shifted to he will fire Powell, then obviously that kind of took on a new a new life of its own. I thought the market reaction was highly intuitive. Obviously, dollar sold off.
Everyone on this call knows this. But to me, really, the most telling, I think, component of the price action across markets was the twist deepening in the rates curve. So effectively, you have the short end moving lower.
You have the long end led by 30s moving higher. The intraday move kind of around midday that day was about 15 basis points peak to trough. And again, given that kind of like the directional divergence between the short end and the long end was some of the punchier rates price action that I've seen kind of in my time here.
So I thought that was intuitive, obviously, because of the inherent implications about what it might mean for monetary policy through the leadership change, but also kind of like, you know, risk term premium, risk premium or probably further out the curve. And so you got that twist move. So I thought that was quite striking.
And look, I think like basically, I kind of like in the dollar's response to kind of what we've been thinking about lately with sterling and that kind of like stagflationary reaction function where, you know, the term premium site effectively has basically introduced the negative correlation between the dollar and long end deals. And that's exactly what happened. So taking a step back, I mean, I think this is an interesting and useful episode.
Obviously, you know, Trump didn't pull the trigger. He walked it back. But we have been asked in the past, you know, like what what do you how would you calibrate or quantify what the price impact would be from from a change in Fed leadership like this?
And the reality was like there's no there was no real kind of credible or legitimate way to to give an answer right to quantify that. But now I think there is because you have that you have the twist evening and you kind of like overlay the dollar today and a price response on there, you can kind of derive a certain beta that allows you at least to have some semblance of an acre about what should happen to the dollar if this kind of like reignites in the future. And basically, as I kind of suggested, we've got a 15 basis point twist evening at a one point two percent move lower peak drop in the DXY.
So roughly you kind of like a 10 basis point kind of like twisty or like that is worth about 75 basis points on the dollar. And then maybe there's upside risk to that beta if there's an actual change kind of thing. So that at least allows us to kind of like wrap our heads around what the dollar might do in the future.
You know, if this if this is worse, the last thing I would say is that, you know, obviously it's quite striking. It makes sense, obviously, that some of the move on unwound, right? Effectively, this evening, unwound the DXY for yesterday rebounded before a bit of weakness today on Friday.
But what I would say is that that kind of strikes me as a little bit too complacent. It feels like, you know, as our economists note, even though, you know, Powell's job security seems to have some institutional protection and probably some backing of the courts as well. It's hard to say that this is definitely going to go away, that we're not going to be hearing about this issue again in the future.
So it strikes me as kind of kind of interesting that. Metrics of risk premium, I guess, have kind of basically dissipated for this issue specifically. I think that's kind of like it's gone a little bit too far.
And so looking at kind of like a broader assessment of dollar risk premium, and we overlay, for example, a model residual across four or five different models to get a sense of just generally what dollar valuations are doing. It has been retracing closer to fair value, i.e. less mispriced over the last couple of weeks. And so basically it suggests that there's like one or two percent headroom just to revisit kind of the more stretched valuation level that we had in the back half of the second quarter.
So I think at the very least, like something, you know, valuations are not prohibited to reintroducing more risk premium here, because at the end of the day, I do think it's probably going to be something that we are going to have to deal with again, you know, at some point. And so kind of the total lack or disappearance of risk premium so quickly after the event, I thought was just a little bit surprising, I guess. One more thing on Waller, as you say, look, I thought Waller's comments last week were interesting.
He made the comment about the cuts after payrolls in which the market effectively depriced the cutting odds for July. And that was obviously a little bit at odds with kind of like how Powell had been communicating around the FOMC and afterwards. So I thought that was interesting.
He repeated those comments again today. It doesn't strike me, though, that the market's taking it all that seriously. You look at kind of like what's priced for July.
It's still on the order of one to two basis points. So it's not even kind of like really giving them the benefit of the doubt, rising up to something like a five basis point premium, which I think would be a little bit more interesting. But so I think for the time being, as it relates to the dollar, I think the risk premium is more squarely like focus and centered around what's happening between, you know, the Fed and the White House more so than Chris Waller, who right now is just like very much in the minority, I think, in the FOMC.
And never a dull day in U.S. policy, but I do agree with you that I don't think we get July, but at the same time, you're only priced for 45 basis points or thereabouts for the rest of the year. And I think at least what Waller's comments do is keep our minds focused on the extreme labor market oriented sort of policymaking within the FOMC. So right now, the labor market isn't cracking.
But at the first signs of something like that coming through in the data, I think current pricing is kind of not baking in any risk premium for for events like that. But just switching gears a little bit here across the pond, James, a lot of investor eyes on sterling at the moment, some of it for fiscal reasons similar to those that have animated yen weakness. But also, I think what seems to focus investor minds of late is this the drift of UK data flow cyclically seems like things are getting worse, not better.
We did get weaker labor market data this week, but services inflation was a bit of a spanner in the works. But our front end rates are eight basis points or so high on the week. So as a sterling bear, how are you reading the totality of UK data at this point?
Yeah, I mean, as a sterling bear, I'm a little bit less worried about the CPI overshoot because you did see some asymmetry in the reaction that you didn't really see sterling strengthen on the print. And I think from a medium term perspective, that makes sense because sterling can weaken if, you know, if you get the stagflationary reaction function from the long end or if you get the disinflationary slowdown dragging Bank of England pricing. So I'm less worried about inflation.
It's to me, it's more about growth. You know, as long as you have growth weakening, then you can get, like I say, either the stagflationary or the disinflationary weakening in sterling. So the sterling has strengthened a bit more on the labour market print, as you say.
No, I think that's because MPC members, you know, you've had Bailey, you've had Ramsden focusing a little bit more on the labour market. And so, you know, that's that's it's a bit more important for the market these days. And after the last print where you got a pretty sizable step down in payrolls growth, the market was looking for, you know, whether that was going to continue or not.
We actually got a decent revision to the last month's payrolls growth, which I think kind of took the some of the left tail risk out of the labour market. But on the whole, the labour market data is still quite weak. We got the REC survey at the start of the week, which was soft.
And then some of the lead indicators in Ramsden's speech from recently where he's talking about some of the alternative labour market data, suggesting redundancies kick on higher in the second half of the year, I think still keeps in play that idea that you can you can have labour market weakness in the second half of the year. The PMIs next week for the UK, I think we've seen a big step down in the services prices component in the last two prints. So let's see what that does.
You know, you could get, well, a bit of a bounce back there just on a bit of mean reversion. But the way that sits right now suggests that you could get a meaningful step down in super core services inflation in the second half of the year. Obviously, we saw this week the CPI print is a little bit too early for that, but that is, you know, there's some life signs of life in the Phillips curve there and the lead indicators, which I think is important for Sterling.
And then the PMIs as well, I'm also looking for whether we see any budget related uncertainty creeping into the surveys, given the kind of negative feedback loop between growth and the autumn budget. Maybe it's a bit too early to see that, but I think that's, you know, similarly to around the November budget last year, do you start to see that creep in? But overall, I think it's potentially all coming together for Sterling in the second half of the year in terms of growth, inflation, labour market, fiscal, Bank of England.
So we're pretty high conviction bears there in the second half of the year. OK, that's I'm convinced hopefully markets cooperate, but I did want to check in with you about two other things. First, long time readers and listeners will know that we've been quite bullish on Scandinavian FX all year, but things haven't quite gone to script off late.
And today is a bit of an exception. I know, fingers crossed it continues. But the question is, do you have a story or a theory for what's gone wrong off late?
And then second, we haven't really talked about the euro so far, other than Patrick mentioning that breakthrough 116.50, maybe that has, you know, flushed out some weak hands. But data wise, concrete information wise, we haven't really heard a lot on the European front with changes next week, given we have PMIs and we also have an ECB meeting. I mean, we're not really expecting any any action, but do you have any priors on either of those events or how the euro behaves around them?
Yeah, for the Scandis, I think it goes back to the June central bank meetings, the kind of dovish surprises there. That's really when the Scandi weakness started. So your kind of bread and butter there is rate spreads.
Right. And you did see rate spreads start to back up in terms of favour, favouring Scandi weakness. But over the past week or so, we've seen those rate spreads stabilise and actually start to reverse.
So that's that's some comfort in terms of, you know, we're still we're still bullish Scandis. And, you know, I think that's it's nice to see those rate spreads stabilising. I think Norges Bank is is the better priced central bank now in terms of, you know, we're pricing a solid probability of a move down to 350 in the policy rate next year, which is our economist forecast.
You know, there's not a communication around a deep easing cycle from Norges Bank anyway. I think Riksbank you could maybe argue is a little bit underpriced in terms of the domestic data is is on the soft side. We're not pricing anywhere near as much, obviously, as for Norges Bank, given that, you know, Riksbank have already, you know, arguably completed almost an entire cutting cycle.
So I think for the stock, you probably need a bit more help from a weaker dollar. You know, you need some of that term premium fiscal risk premium that Patrick was talking about. And Stockie can really benefit from that, as we saw in Q1.
I know that was a bit more equity flow led, but we've seen the Scandis really react to dollar weakness. And I think, you know, whisper it quietly, but, you know, at the time of recording, we might be seeing a little bit of that today. You know, at the time of recording, we've got Scandis benefiting, benefiting, I think, a little bit from the dollar weakness on the day.
But, you know, the growth set up in Norway is solid. It has been for a long time. It's really the only G10 economy that where the surveys are explicitly telling you that there's resiliency toward the global trade uncertainty.
So for us, the knocky move is the cleaner fade. You've got a well-priced central bank. You've got solid relative growth.
So I think if we can see the dollar weakness start to kick back in, Scandis, including Stockie, can really benefit from that. Turning to the euro, the PMIs next week, the ECB, I think the PMI is actually creeping up in terms of importance levels here in terms of it is it is important that you see the resiliency story continue in Europe. I don't think you don't need a booming European economy for euro dollar to get to 120.
It's much more about U.S. catchdown. But you do need to see the resiliency story creep back in. And obviously we've seen data surprises come off in Europe recently.
So, you know, I'm just looking for the for the resiliency story to continue. You know, you've seen ECB cuts feeding through to the bank lending data. You've obviously got fiscal policy potentially supporting growth in the second half of the year.
So, you know, we need to see that resiliency. I think it'll be it's not going to propel the currency necessarily next next week, but it's a sufficient condition that you know that you don't get a sell off. I think I think if there's any kind of doubts creeping in about the European growth story and then ECB, like you say, not expecting much action, unchanged expected on the policy rate, keeping the guidance open for September, potential potential cut there.
And we're listening closely for guidance around any pushback on the currency. So obviously we've seen Digindos and the likes of Digindos pushing back on euro a little bit, talking about 120 as a key level. Ultimately, we think that's a little bit of a fade.
But I think FX will be a bit more focused on that this week than it has next week than it has been previously. Ultimately, for euro dollar, I think, you know, as as you mentioned, Irina and Patrick, I think I think some of the broader idiosyncratic risk like the Japan election, the UK developments are kind of holding euro dollar back a little bit rather than it being a major change in the euro story itself. And you can often get kind of idiosyncratic risk holding back major trends.
Obviously, we're in a little bit of illiquidity summer, summer markets, but we're encouraged by the euro price action as it's grinded back down to the trend trend support line. You know, I think I think what Patrick mentioned around higher term premium while data slows in the U.S. is an important dynamic for the dollar. And I think once we get past some of this event risk, you know, potentially euro dollar is a bit more free to try and price some of that risk premium.
Understood. So just just moving away from market based price action for a minute and Pat, last question for you on this issue of flows, which has been a hot button topic in FX all year. We got two meaningful reports this week, the much awaited May tick report that really didn't do the South America trade much favors and then a first quarter COFR report, which was curiously published and retracted and then republished with corrected data.
I don't think I've seen anything like that in my life. What do you make of both of those? Yeah, thanks.
Yes, a bit of conflicting signals. I mean, as you say, there's a lot there was a lot of excitement around COFR when it was released because it effectively indicated, you know, basically six sigma moves in Aussie and Swiss only to be redacted. I agree.
It hasn't been I've never seen anything like that before in terms of the redaction. But nevertheless, I think there are still some some interesting moves in the COFR data. It suggests kind of like net reserve shedding in the first quarter dollar demand, roughly flat on a valuation adjusted basis.
So I think really kind of the standout flows are more yen selling, CAD selling, some sterling demand. If you kind of squint, I think the kind of the signal to me there is that the rotation in COFR reserves in the first quarter were generally consistent with perhaps some tariff prepositioning. So, again, like, you know, the the largest FX reserve selling was in Asia linked currencies between CNY, Aussie and Yadin.
Europe was a little bit more mixed. CAD had some selling. So I think that's probably the best way to look at it.
Of course, like I think a lot of people will be like, well, it was pre-liberation day really tells us so much. It's obviously very lagged and it doesn't kind of capture the sell U.S. asset kind of theme. So we did try and model kind of like what based on other kind of reserve data that's available for the second quarter, you know, what might have been happening on the whole.
I think there's generally, you know, it indicates basically 200 billion dollars potentially of global FX reserves have been cut in the first half. And if you kind of just like give that the appropriate COFR share, a hundred ish kind of billion dollar of reserve managers selling the U.S. dollar. The U.S. dollar, I think that probably sounds right.
It does kind of like generally suggest that the reserve manager community is kind of diversifying a little bit more away this year, huge inflow into the U.S. on the order of about 300 billion dollars. You know, basically, it seemed to me as if it was led generally by the private sector and also pretty heavily concentrated in equity. So as you say, that kind of does a little bit of a dent to the sell U.S. asset theme.
I would note, though, that, you know, the dollar was impervious technically to that flow. Right. So despite the sizable foreign demand for U.S. assets, the dollar still sold off in May, suggesting that there's other various forces out there that are also quite sizable.
Maybe the reserve manager community is a part of that. And then, you know, just statistically speaking, there was a huge inflow. You question whether that can kind of continue to persist in the second half.
So I think the bottom line takeaway for dollar bears is that you should be encouraged that the dollar sell off kind of withstood what was otherwise like a strong, you know, a strong rebuying or rebalancing of those portfolio flows. My gut says that probably isn't going to persist in the same intensity going forward. And perhaps, you know, some of these other communities are still reconsidering their portfolio allocations and or their FX ratio decisions.
So I don't think that, you know, the broad, the broadly, you know, U.S. who owes U.S. assets and all that. I don't think that's by any means done, even just by what kind of tick data might have suggested for me. Right.
OK, understood. Let's leave it there for this week, chaps. You can find all our views and research on JPMM.com.
Thanks to everybody for listening in. This communication is provided for information purposes only. Please refer to JPMorgan Research Reports related to its content for more information, including important disclosures. 2025 JPMorgan Chase & Company.
All rights reserved. This episode was recorded on July 18, 2025.