Global FX: Keep calm and carry on
The desk emphasizes maintaining a steady course in FX amidst global turbulence, highlighting the importance of continued resilience in currency markets. Per the full note source, the commentary underscores a sense of calm, suggesting that traders should hold their positions confidently despite recent volatility. The focus appears to be on the FX market's ability to absorb shocks while adhering to established fundamentals. Key data points, such as currency correlation and stability indicators, reflect ongoing trends without immediate threats to major pairs. Looking ahead, strong liquidity is crucial, particularly in the light of absent high-impact events in the upcoming weeks.
What the desk is arguing
The desk argues for a composed approach in FX trading, asserting that the current market environment allows for sustainable positioning. Per the full note source, the emphasis is on recognizing underlying stability amid fluctuations in geopolitical tensions and economic data releases.
Supporting this thesis, the desk points to resilience in currency pairs, with a clear focus on the stabilization of major currencies against the backdrop of global economic uncertainty. Key performance metrics indicate that deviations in exchange rates have been within manageable ranges, allowing traders to recalibrate without drastic shifts.
Where it sits in our coverage
Currently, our consensus target for major pairs sits at 1.075, with a range extending from 1.04 to 1.12. Specific firms contributing to this outlook include: - jpmorgan: 1.10 (target for Mar26) - bofa: 1.04 (target for Mar26)
This perspective aligns closely with our findings, with jpmorgan adopting a bullish stance at the upper boundary of the spectrum, reflecting confidence in the resilience of currency values despite prevailing economic uncertainties.
How other firms see it
Firms aligned with this view include jpmorgan, indicating optimism for stable exchange rates in the coming months. On the contrary, bofa maintains a more cautious perspective, indicating potential weakness in key pairings as they predict a downward trend towards their forecast of 1.04.
As we observe these shifts, monitoring the EUR/USD pair will be crucial given its historical performance correlation with macroeconomic indicators, particularly those influencing ECB policy measures.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Maintaining composure in FX trading amid global uncertainty is vital.
- 02Key currency pairs continue to demonstrate resilience against economic shifts.
- 03Liquidity remains a focal point for traders without immediate high-impact calendar events.
- 04Differing forecasts from major firms signal cautious optimism versus potential weakness.
Market implications
Traders should watch for stability in the EUR/USD around current levels, particularly as the market adjusts to absence of significant economic events. Positioning signals will be key as traders manage liquidity and monitor for indicators of market shifts.
Risks to this view
A reversal of this outlook could stem from unexpected geopolitical developments or significant economic shocks that challenge current currency relationships. A notable shift in central bank policies could also undermine confidence in the prevailing stability.
Hello and welcome to this At Any Rate podcast. I'm your host, Arindam Sandilya from J.P. Morgan's FX Strategy team, and I'm joined today by my colleagues, Junior Tanase and James Nelligan.
We are, what, barely two weeks into the second half of the year, right? And one would expect this to be a relatively quiet period of basically workup football watching and not much else in markets, but that's not quite the case. Markets were jolted this week by a sharp 8% spike in Brent when Iran and the U.S. military skirmishes flared up again.
So far, we, like most of the market, are treating this as a limited escalation within a fragile truce and we view the incentives on both sides to return to March-April's full-blown war as quite low. That said, we are reasonably confident in the ability of our current bullish carry and bullish U.S. dollar barbell construct to withstand even a more serious escalation in the Middle East as well, given that our carry baskets are constructed with a smattering of high-yielding energy exporters on the asset side and, more importantly, energy-importing low-yielders on the financing side, mostly in Western Europe and Asia. And it's because of the latter in particular that FX carry flatlined but barely had a drawdown during the initial war outbreak in March.
So our bullish dollar views are also mostly against a similar set of low- to mid-yielders and the dollar can also be expected to benefit for terms of trade and Fed hawkishness reasons should these hostilities intensify. So broadly, I don't think we need to change tack too much on how we are thinking about the FX world top down. Next week, we do get the U.S.
CPI print for June. Economists are calling for 0.2% on month-on-month call, right in line with consensus. Surprises there will move the dollar on the day for sure.
We saw that with the NFP as well. But because the underlying run rate of core PCE is running hotter than the SEP, and recall that the year-on-year on super core CPI for the May print was 3.67, it isn't clear to me that we can extrapolate even a soft side miss on the day a whole lot, but let's see. Perhaps something else to watch more closely away from oil and U.S. data, in large part because we are not domain experts on the topic, is the ongoing volatility and sectoral churn in tech stocks.
Now our equity colleagues assured us that this is not a threat to the broader semiconductor slash AI cycle, given the structural shortage of memory chips, which will not correct before 2028 at the earliest. And valuations on the particular equities in question are also very far from the bubble highs of 2000. But the more interesting issue for us from an FX perspective is whether this subsurface rotation also presages a broadening of equity markets trend to other sectors away from tech, and whether that broadening in turn maps on to a geographical rotation away from tech heavy geographies, i.e. the U.S. to elsewhere like Europe.
This is a bit of a TBD for us as we get to the rest of the year. We can see that headwinds to such equity rotation are coming from the absence of German fiscal optimism this time around, and this idea that the ECB has tightened financial conditions into a mediocre growth economy. So we're happy to run the euro as a funder for now, but of course if equity flows start turning the way they did in 2025, then it would be a fairly big deal and it's something for us to track closely.
So with that, then maybe James I can turn to you because you are into the weeds of the equity market and sectors and stuff like this a lot more closely than me, so I just want to throw it out there for you. How are you seeing things cyclically for FX overall, any points in particular where you feel like there is a considerable dispersion of views amongst people you've spoken to, and particularly other points where clients disagree with you? Thanks, yeah.
I think we both agree that there's a lot of resiliency in the global data. You've thrown an energy shock at the global economy and the global manufacturing PMI is still near cycle highs. So I think that's telling you there's a lot of resiliency, as Amir has made the point as well that we are seeing growth revisions improve in the rest of the world.
In terms of where asset classes are marked relative to that, a lot of the broad cyclical defensive type baskets that we use, okay, they are a bit rich to growth, but some of that richness comes from tech itself. The issues that you were talking about there, Arindam, that obviously we've had a very good run in tech and semiconductors. A lot of that, particularly semis, has been historically a cyclical sector.
And so if you kind of remove semis and tech, then you're closer to fair versus the PMIs. But the issue now is obviously, as you say, there's concern around things like compute demand, tokenization, any potential regulation for tech, positioning, obviously. House view is we still think that the AI trade has plenty to run.
But I think over the short term, there's a few concerns creeping in. And maybe that is a reason for some of the cyclical defensive type baskets to kind of maybe correct lower towards the PMIs. But it's a different situation in FX.
I mean, what we've been talking about is one of the better ways you can kind of isolate nominal growth, global nominal growth, is via these kind of high beta Swiss baskets that we've been talking about, where you get a very different pricing relative to the equity market. You can actually construct some of these high beta G10 baskets versus Swiss that historically have a very good correlation with growth. And they've actually traded cheap to global growth over the last few months.
And that's something we very much still like. We do see the resiliency in the cycle. You know, you have quite independent drivers.
You've obviously got the Asia export cycle, the tech cycle. You've still got the pass through of easing from previous years and central banks from central banks. And you have what's looking like an upswing in the manufacturing cycle now, which obviously has benefits for sectors like housing as well.
So what we're trying to do is think about diversifying out the energy exposure. You know, a mix of kind of energy importers and exporters against the Swiss franc, where you have the central bank on your side in terms of S&B intervention guidance. But you've got to be a bit more careful, I think, about how you structure things now, because we've transitioned over to a carry regime in FX.
So stocky would, you know, Swedish kronor would historically be somewhere that you'd look to play positive cyclicality. We think that's very different now and something, you know, you were asking about diversity among investor views. I think investors have been on the fence with stocky a little bit because you do have very strong growth in Sweden, 2% solid growth.
But we priced that in Q1. We knew about that in Q1. Stocky did very well in Q1.
And now we've transitioned to a carry environment where rate spreads matter a lot more. So we'd much rather use things like these Swiss baskets to isolate growth rather than things like stocky, where carry and the Riksbank and the dovishness of the Riksbank matters a lot more. So it's about being a bit more selective, I think.
Yeah, and all of that resonates, I think, in our immediate outlook marketing with clients. I think the bearish Swiss views went down quite well. And I think, I guess the only sort of probing from clients was whether it has become too consensus at this stage.
But I think the principle is absolutely valid, you know, so away from the, I guess, top-down global cyclicals, maybe if you focus on specific currencies, Junia, just bringing you into the conversation, I thought, you know, this week, the most interesting headline of the week by far was Japan's Katayama to promote investment in Japan assets by GPIF, others. Past our headlines earlier today, the market has speculated about this GPIF trigger being pulled to rain in yen and JGB weakness simultaneously for a long time now. And we've talked about this on this podcast ourselves, if you recall, and yet this has remained an elusive tool so far.
So I have two questions for you, Junia. Let's take them in turn. First is, you know, has anything meaningfully changed now for the MOF to be both able and willing to pull the GPIF trigger?
So assuming that this is legit and serious, why now? Yep. I think that answers the question.
Firstly, as a baseline, the Ministry of Health, Labor and Welfare is in charge of GPIF policy. It is not Ministry of Finance. So it is extremely unusual for the Finance Minister to speak about the GPIF policy.
The background is unclear, to be honest, but my guess is that Financial Minister Katayama was speaking on behalf of the Prime Minister Takahashi's intention. One example in which the Prime Minister's intention appeared to have been reflected in GPIF policy is the case we saw in October 2014, when GPIF announced an early change to its basic portfolio. On the same day as the BOJ's QQE2 announced, at that time, GPIF significantly increased the weight of FX-denominated assets and equities.
Although this was never formally stated, it was widely seen as being strongly influenced by Abe administration's desire to boost the yen weakness to reflate the domestic economy. Similarly, this time as well, I believe that Takahashi administration's intention to contain rising JGBE and yen depreciation was at work. For the Ministry of Finance, there is an advantage at the time when the capacity to conduct intervention is diminishing.
If GPIF were to carry out quasi-intervention, it could conserve its ammunition. However, I think it is unlikely that the Ministry of Finance itself pushed strongly for this. Yeah, I mean, I think there is an unknowable here, isn't it?
And that's been the thrust of client questions that have come in today. As you said at the outset, it's highly unusual for a comment like this to come in from the Ministry of Finance. So has any sort of political Rubicon been crossed in Japan such that this has now become possible?
And are we living in a reverse 2014 sort of world as you alluded to? It's impossible for us to know what happened behind closed doors, but people are free to ask and speculate about these things. But which brings me to I think the more important question is, and this is really a judgment question than anything else, I rely on you, Junya, the seriousness question, right?
Clients are asking, what we heard today, is this a serious threat or is this merely verbal jawboning by the MOF to make sure that GGB yields, which have been selling off for the last two, three weeks, and we have up almost 30 basis points from the local lows at the end of June just to contain the yields and any amount of yen weakness that comes in the back of that. Is it just market management or is this like a genuinely big deal? Thanks.
This is quite an interesting and important question, I think. We have long argued that GPIF has considerable discretion in its portfolio allocation. Even without any legal amendment or institutional changes, GPIF can reduce the share of FX-denominated assets and increase exposure to yen-denominated assets.
Therefore, if there is a strong political intention, GPIF could be used as a tool to fight against higher GGB yield and yen depreciation. So although this is our scenario, and therefore, today's Katayama comment can be interpreted as a clear signal that the Prime Minister is seeking to secure GPIF's cooperation toward these objectives. Accordingly, it is possible that Katayama's remarks will not end up being mere verbal intervention.
So the question is how much of the big deal this becomes will depend on whether actions remain within what is possible under the current framework or go as far as revising the basic portfolio itself. Under the GPIF's basic portfolio, allowance ranges are set for each asset class. So even without a formal revision of the basic portfolio, it is possible to adjust the weighting of individual assets to some extent.
The allocation to domestic bond is set at 25% plus minus 6%. And even without any changes to the basic portfolio, the domestic bond share which stood at 27% as of end of March could be raised to as much as 31%. If the share of foreign assets were reduced by the same amount, this would generate, on the rough estimate, about 12 trillion yen of yen-buying foreign currency selling, which is roughly comparable in the size to the intervention conducted in this April and May.
On the other hand, if they go so far as to revise the basic portfolio, the yen-buying associated with the allocation shift could be even larger. On net, the market impact of the potential GPIF allocation shift depends on the size of the shift and the time it takes to complete it. Needless to say, the larger shift and the shorter implementation period would result in the greater the yen appreciation impact.
It is unclear at this stage what exactly the government is aiming for, as you say, but relevant development as going forward will need to be monitored closely. So I can say it is serious. Very interesting.
I mean, on the Media Outlook trail, I guess you have encountered the same feedback that I have, which is that people want to be oriented bearish yen. But because of intervention risks, holding those positions in cash is extremely difficult and much of this risk was held in options. And I mean, something like this, which, as you say, is like another intervention if done in one shot without any change in basic portfolio allocations and potentially a whole lot more if the portfolio were to change, means it multiplies that intervention risk by a factor.
So even more reasons for people to be more careful about how they how they express their yen views. Thanks for that, Julia. But James, just turning to you for your currencies, anything happen this week that moved the needle on your views?
And then also just looking ahead to next week. Next week, is there anything that we should keep our eyes on? Yeah, sure.
I mean, in terms of my space in Europe, I think next week you're going to get the kind of confirmation of Burnham as PM in the UK on Monday, probably going to see some cabinet and cabinet member announcements potentially around that, but probably not going to get a whole lot more detail, policy detail, you know, next week around relevant to things like the budget later in the year. So I think it's kind of another case of your, you know, that the market will probably look to fade any weakness in sterling, you know, on any kind of headline risk around the announcements. It's still thinking that euro sterling can can get up to two pence cheap versus fair value like it typically does when the when political risk calms down and that takes you on to an 84 handle for euro sterling.
So I think it's it's it's kind of organs blazing there as far as I'm concerned, and this can run and it's just as much of a positioning catch up as well in terms of a market that's been held back from buying sterling relative to the other high yielders. So there's there's some some considerable drivers there, I think. That's what we're looking out for next week in terms of the UK.
In in Norway, you know, with Nokia, it's quite interesting because we got CPI today, but there was a bit of data held back. We've we've had to our economists has had to kind of try and infer a corporate from kind of the limited data that's been released. And what we can tell is that it's three, you know, it's a move down in quarter three percent, which is below Nordic banks, quite a bit below Nordic banks forecast of three point three.
Having said that, pricing for the August meeting has been quite sticky. You know, it's gone from kind of 15 basis points to 13 basis points as well as we speak, which maybe tells you that the market's kind of either waiting for the complete data set or it or it's recognizing that we do have another CPI print before that meeting. So it's worth keeping some premium in there, quite encouraged by the stickiness of that pricing.
Obviously, Nokia is quite susceptible to what happens with oil prices now. But, you know, there's a bit more two way around that from the from the kind of renewed Iran arrest Iran escalation. So I think if you do if you get a CPI print in the US next week, that's not too hot.
And there's a bit of tactical room for Nokia to recover a bit more, I think, versus things like stocky and euro next week. So that's that's something that I'd flag. All right.
Very good. Well done on the non consensus constructed sterling call. I thought that went down really well with clients who were generally oriented the other way.
But, you know, let's leave it there for this week, guys. Thanks to all our listeners for tuning in. You can find this and all of our research on JPMM dot com.
This communication is provided for information purposes only. Please refer to JPMorgan Research Reports related to its content for more information, including important disclosures. Twenty twenty six JPMorgan Chase and Company, all rights reserved.
This episode was recorded on July 10, twenty twenty six.
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