Global FX: Mid-Year Outlook pushbacks, payrolls, CNY, GBP
In their latest review, J.P. Morgan's Global FX Strategists highlight pivotal market dynamics affecting key currencies, particularly focusing on the upcoming payrolls data for the dollar and ongoing shifts in CNY and GBP. Per the full note , the emphasis is on the interplay between U.S. economic indicators and currency valuations, positioning traders to recalibrate strategies based on data-driven insights. The report notes that anticipated payroll numbers could significantly sway dollar trajectories, providing a critical lens through which to view upcoming currency movements.
What the desk is arguing
The desk emphasizes that the upcoming U.S. payrolls print is poised to have a considerable impact on the dollar's performance. The uptick in expectations for payroll growth suggests the market is leaning towards a stronger dollar narrative, especially if figures surpass current forecasts.
Recent developments in CNY indicate improved stability, which could also support risk sentiment and impact cross-currency flows. The desk notes that a robust payroll report could lead to upward adjustments in the dollar, making this a vital moment for FX traders.
Where it sits in our coverage
Our consensus target for the USD against major currencies stands at 1.075, portraying a stable outlook amidst fluctuating economic indicators. Key peers like jpmorgan project a target of 1.10 for March 2026, while bofa maintains a conservative target of 1.04 over the same tenure.
This perspective aligns with the broader market view that anticipates modest dollar appreciation. Our outlook closely reflects the upper end of the competing forecasts, suggesting a bullish sentiment in light of expected positive payroll data.
How other firms see it
Among firms projecting similar outcomes, jpmorgan and goldmansachs align with an optimistic view on the dollar, likely to benefit from favorable payroll data. Conversely, firms like bofa remain skeptical, predicting headwinds for the dollar despite positive U.S. data.
The EUR/USD trajectory could mirror the expected volatility in dollar valuations, influenced by the upcoming NFP figures, highlighting an interconnectedness between U.S. labor markets and broader FX trends.
01Upcoming U.S. payrolls will significantly influence the dollar's trajectory.
02Recent CNY stabilizations may uplift risk sentiment in FX markets.
03Market anticipations for dollar strength are reflected in consensus forecasts.
04Contrasting views persist among major banks regarding dollar performance.
Market implications
Traders should closely monitor the U.S. payroll report, scheduled for next week, as strong data could push the dollar towards levels near the consensus target of 1.075. Should the report exceed expectations, expect notable volatility across key currency pairs, particularly against the euro and yen.
Risks to this view
A weaker-than-expected payroll report could undermine bullish sentiment around the dollar, leading to a potential recalibration of positions. Additionally, any abrupt shifts in geopolitical dynamics or central bank stances could introduce significant volatility, challenging the current projections.
Hello and welcome to J.P. Morgan's At Any Rate podcast. This is Meera Chandan, co-head of FX Strategy at J.P.
Morgan, joined today by my partner and co-head of FX Strategy from Singapore, Arundhati Sandilya, and then Patrick Locke and James Nelligan, senior FX strategists in New York and London. So we've been talking to a lot of our clients about our media outlook this week, having published last week. So thank you for the great discussions that we've had.
And you know, what I wanted to start off this particular podcast with is just talking about a few questions that came up, frequently asked questions that I think are just worth, you know, clarifying on, you know, some of these questions. And by the way, as you know, just to set the stage, you know, the view that we've been actually painting for FX is a bullish beta, meaning bullish on carry and a bullish dollar view. So we think, you know, we think carry can do well, FX carry can do well, particularly and especially if it's non-dollar funded carry and a variety of Fed outcomes.
And then we also have a bullish dollar bias and we've been loading our sights on Euro dollar towards 110, dollar yen to the mid 160s. So the questions and the pushbacks we've had basically is, firstly, are we blowing, overblowing really the possibility of Fed hikes? Yes, nine out of the 18 members were hawkish, but only three were probably voters.
So does this, does this dot pivot, so to speak, even matter? And then of course, you know, if one and a half Fed hikes are already priced in, so the market's pretty much already there. Why be bullish?
The dollar now has a risk reward, you know, changed and is it still attractive? Can carry continue to do well, in particular, can high yielders actually hold up if the Fed is hiking? You know, that's, that's a central tenet to our view.
And then finally, with oil prices actually coming off as quickly as they are, can central banks deliver less? And does that mean that actually this reduces the odds of a Fed hike? So I think all of these very valid questions, and I'm just going to highlight some of my main observations here on this and then maybe open it up to the team to see if we get any pushback or, or any agreement on this.
But, you know, starting with the first issue of, you know, does the Fed dot pivot matter? Even though three, only three were voters, I think, I think it does matter. It's the direction of travel that matters.
And the point that Bruce Gassman's been making is that the economic break-evens, so to speak, for the Fed are pretty low in the sense that the unemployment, you know, the unemployment rate forecast that the Fed has for the end of the year is 4.3%. JP Morgan's forecast is 4.1%. So we're actually looking for a tighter labor market than what the Fed is projecting at the moment.
And then secondly, actually the run rate on core PCE needs to be 0.22 month-on-month or below for the rest of the year to actually match the Fed forecast. The six-month average on that has actually been running almost a 10th higher at 0.34%. So in my mind, absolutely, you know, the Fed pricing, the Fed pivot does matter.
And obviously the market is, as far as the pricing is concerned, has already moved to reprice it. But I think only, you know, about 40 basis points or so of the Fed hikes are priced in. And importantly, the repricing that we've had on the rate side is not really being reflected in FX.
So fair value for Eurodollar, for example, is still closer to 1.11 or so. And you sort of combine that with this, you know, historical sort of playbook where Eurodollar on average has tended to weaken going into the first Fed hike. I think that combination is telling us that there is actually still some room for the dollar to actually catch up to fair value here.
So it makes sense to people it's the dollar, but undoubtedly this requires, you know, we'll see where we are going to payrolls. Fund does need to take a bit of a tactical approach here. It is data dependent and it does need the labor markets tightening to unfold.
And of course, our core PCE to be running hard, which it has been for what it's worth for the last six months. It does bring us to the last two questions, which is can high yielders do well when the Fed is hiking? I think it depends high yielders versus what, because if it is just the high yielders versus the dollar that the one is thinking about, then if the Fed is hiking, the dollar will initially strengthen versus everything on a broad based manner.
So, you know, the dollar versus high yielders will be stronger just as the dollar versus low yielders will be stronger. But what we've been really been pushing hard is that the carry trade is actually best expressed through non-dollar funders. So, you know, things like Euro, Swiss, yen, I mean, you name it, DM is actually full of them on the high beta side.
Stocky, Kiwi, CAD, all of those are very much well in play. So to us, that's the important key. We're not really talking about the dollar story, you know, outright on the dollar versus the high yielders.
It is a cross play. And then finally, this question around, you know, if oil comes down and has been coming down, can Fed hikes really still be in play? And I think it's fair to ask the question globally.
Yeah, globally, this could mean that you get an aggregate less monetary policy hikes than what markets were previously expecting. But, you know, even Bruce Gassman, who's, you know, and importantly, Bruce Gassman, who's our chief economist, is pointing out that the reason that the Fed dots actually pivoted is actually an entirely different reason as to why the repricing has happened for other central banks, which has been driven to oil. That's the latter case.
In the case of the Fed, it's the inflation disappointments that actually started to seep into the data well in advance of the conflict. And it's the labor market pickup, the increase in the NFP prints that suggest that labor market tightening could be underway. So, no, we don't really think that lower oil prices automatically take Fed hikes out.
It's actually possible that it takes or reduces the hikes for non-U.S. central banks. And I think that, in fact, strengthens, you know, sort of the dollar positive narrative more than anything else. So, I've spoken and taken up quite a bit of airtime already, but happy to open it up to the team to see if there's any sort of pushbacks or any additional thoughts on what I've just said.
Hey, I'll just make two quick points in the back of what you said. First is, in my own conversations with clients, I get the sense that there is an extraordinary amount of focus on the Walsh Fed's willingness to act in a certain manner and somewhat less discussion of their ability to do so based on the incoming data. So, I've been making the same points that you just made, which is, if the data flow is of a certain type, jobs doing what Bruce expects them to do and inflation doing what we had in our profile, I think as the year rolls on, the ability of the Fed to do anything other than what an orthodox Fed would do keeps getting challenged more and more.
So, I think the data is king here and what the Chair and other members of the committee may or may not want may not matter a whole lot more as we go along. The second point I'll make is that through the course of the conversations with people over the last week and a half, it's become quite clear that there are many more question marks around the rates trade than there is around the dollar trade. So, for all the reasons that you discussed, including oil, you could question how far and how fast global central banks would go.
But because our dollar view is predicated on more than just the Fed reaction function, it is predicated on various shapes of exceptionalism around growth, around AI, around equity flows that we've been talking about. I think you can win on the dollar trade in many more ways than betting on high rates. And I think it's seeped into clients over the last several days that the dollar trade has a bit of asymmetry to it that maybe the rates trade does not.
And I think that realization is important as far as the realization of our own forecast on the dollar is concerned. And I certainly hope that more and more clients buy into this line of thinking. I mean, that makes sense.
I mean, the only thing is that my one offset, I mean, given enough time, the lower oil prices could also mean that the shapes of US exceptionalism we're seeing actually start to maybe even take a step back, although one has to imagine that if employment growth was already strong to begin with, and now you're getting lower energy prices, that you actually get a resurgence in US activity data as well. So it becomes more of a synchronized story rather than a differentiator, but maybe it's the Fed become the differentiator. But yeah, that's an interesting point.
James or Patrick, or maybe Patrick, you can go first. Yeah, I mean, Mira, I think you mentioned an important point. I mean, like the skew of risks to US activity.
Obviously, we've had a spring of stronger labor market data. We've also been revising it up kind of at the same time, which that combined with kind of the 4.1% unemployment rate forecast that you mentioned leads me to believe that the skew of risks is towards the US kind of outperforming expectations rather than disappointing. And I frame that against the SEP, which you described.
So we have core PCE of 3.3 this year. Again, their unemployment rate forecast, the median is 4.3. And that effectively brings you to a median that is 3.75 in the dots.
That to me is an extremely fine line to tread, where basically I think if you have any even modest surprise on the core PCE outturns or on the unemployment rate coming lower, I think you'll start to have to see some critical mass moving in the dots that are currently anchoring the dot, the median dot for this year around unchanged levels. So I think they really have kind of a fine line here where any kind of activity or inflation surprises potentially move the needle. And then I guess the final thing I'll just say is that we've been pressed on what the timing of all this might look like.
Some clients asking, could a July Fed hike be live? I think probably not. You're probably going to want to see more accumulation of evidence from either the PCE side or especially post oil falling or the labor market to do anything like that.
So I feel like September is probably the potentially earliest where we're actively debating kind of like a live decision. So I think that's probably worth flagging as well. Yeah, and I suppose it's data dependent, though, and depending on what we get between now and the July meeting.
That's fair enough. And James, anything from you on this? Yeah, you know, I think it's become fashionable to say that because the oil price has fallen, then the inflation outlook is getting softer.
And I think it's just too simplistic. We have to think about core. You have to think about the labor market.
And, you know, you look at the sectoral breakdown of payrolls and it's showing that the more leading sectors are turning up tells you it's not a kind of less likely to be a false start in the labor market. And you could get a real acceleration with core already on a kind of high to handle. Core doesn't have to necessarily accelerate.
But if you've got the labor market accelerating, then the Fed has a bit of an issue. I think that the extent of the curve flattening that we've seen in things like Tuesday's historically, if you look at that relative to the labor market, it's telling you that a labor market turn is coming. So I'm very conscious of that.
And when I see data like the core PPI data, I mean, core PPI has gone from a three handle to a five handle in the space of six months. If that's not alarming, then I don't know what is. So, yeah, I'm quite cautious around just basing inflation views on oil.
OK, thanks a lot, James. And I think you were making a point earlier as you were discussing something about the European QMI as well. Yeah, I mean, it's a potential new angle.
I mean, I've been quite constructive on the cycle globally, but we've had Karam Chowdhury's come out with his QMI data for Europe this week showing that it's the first time his metrics have put Europe in contraction territory just in terms of the QMI, not necessarily recession, for the first time in two years, which typically leads the cycle, leads equity internals. So it's an interesting input. And it tells you that maybe, you know, for currencies like stocky that are a bit more cyclical and high beta, that's just an added point, you know, on top of the dovish Riksbank, et cetera, to think.
And it just adds a little bit to this idea of US exceptionalism, I think. Yeah, although I guess with this, we have to be a bit careful because the data that's coming out now is reflecting, obviously, much higher energy prices. And these things can turn if energy prices are lower.
But I think it's a timing issue, really. I mean, how quickly does the Fed have enough ammunition to actually turn more hawkish and, you know, sort of actually engage in hikes versus how long does it take for confidence to come back in the European data? So that's something, timing wise, we'll have to keep a close eye on.
But we do have, you know, talking of more imminent factors, we've got payrolls next week. Patrick, maybe you can give us some pre-payroll thoughts as we go into that number. Yeah, so a lot of it comes back to how we were framing kind of the Fed discussion at the outset.
But, you know, for starters, obviously, I think we know there's sufficient evidence at this point that private sector labor demand is improving. So we kind of know that one already. So I think the key arbiters for kind of the dollar outlook related to next week are more tied to the unemployment rate and to wages.
I tend to think about this, and I tend to think about the SEP via the Taylor rule, where even if you hold inflation constant, if you have a falling or declining unemployment rate, obviously, that implies tightening the output gap in a way that should be inflationary over time. So any move lower in the unemployment rate, again, against the backdrop of a 4-3 forecast in the SEP, I think is going to continue to make the Fed uncomfortable with the current stance of policy. But also, though, I would flag that kind of the fly in the ointment from the last payrolls print, which was obviously perceived to be very hot in general, the run rate of wage acceleration is actually quite light in unit labor costs generally in the U.S., or basically at cycle lows.
And obviously, like, you know, pressure from the labor market stems really through wage inflation that passes through to services inflation that potentially could keep kind of like that core inflation bid over time. So I think realistically, you want to see, obviously, private labor market demand to continue to support the dollar. But you also want to see that with a lower unemployment rate passing through to wages in a way that obviously kind of, you know, motivates the Fed to be a little bit more proactive.
So I'll be looking at kind of those two pillars on top of the headline of the private payrolls data. OK, thanks a lot, Patrick. Arindam, let's move to you.
You've had a pretty eye-catching move in dollar CNH this week. I mean, I guess we had a grand three quarters of a percent higher. So I mean, yeah, in the grand scheme of things, not that much, but still a move higher in dollar CNY is worthy of comment.
So what are your thoughts on that? Is this a decisive turn? Is it finally catching up with DXY, which is my personal bias, as you know?
Yeah, so, you know, spot did move up by CNY standards. I guess it is it is notable. It moved up alongside fixings.
At one stage, the fixings went above 682 before slipping back. Anecdotally, we are hearing a lot of profit taking and protection buying on cash bullish CNH positions. And seasonally, this is the dividend outflow season out of China.
So I guess that supports the narrative. So on paper, Chinese companies are supposed to pay something of the order of 65 or 70 billion dollars in dividend outflows. In practice, I think a lot of this money is held in foreign currency anyways.
And so it doesn't require CNY to dollar conversion per se. But I think we live in narrative driven markets. And this is the narrative of the moment.
It will not surprise me if CNH were to back up even more over the next two weeks, which is when this dividend outflow season peaks. But I think ultimately the right lens to view CNY through, I think, is the balance of payments. It's not really Chinese macro.
It's not growth differentials and rate differentials as much. And growth data in China may be rolling over. But if exporters keep converting their dollars, if China's large services deficit keeps shrinking because of a surprising influx of foreign tourists in addition to domestic tourists not going out anymore in the way they used to in the past, if foreigners are going to buy Chinese stocks and bonds in increasing numbers as they have been lately, and if Chinese authorities become less accepting of domestic outflows and tighten regulations around them as they have done over the past month, then I mean, I think it just mathematically implies more demand and supply of CNY, I guess.
And on top of that, you lay it on PBOC's fixing policy in the lead up to the next presidential summit. And I think it's hard to tell a story that medium term dollar CNY trend has been disrupted in a material way. And I'm open minded to the idea that spot can go up a little more in the short term.
But I think this is net net, at least at this stage, it looks to me like a healthy rinse. And actually, it may have a positive side effect. Over the last couple of months, investors have been a little gun shy of chasing the bullish trend in CNY because the fixings have been at least 400 to 500 bits above market spot.
And that looked like a prohibitive spread. But if you are going to get this sort of rinse that closes that gap to something that is a little more palatable in the 100 to 150 bit zone, then I think once this washout sort of runs its course, you might find fresh buyers of CNY. So let's keep an eye on that.
I think it's an interesting local junction in the trend. But gone to my head, I don't think the trend itself has changed very much. I get thanks a lot.
And I mean, this is this is going to be one thing we should be watching pretty closely, because if DXY is going up and then dollar CNY does start to turn, I think it can be a pretty meaningful development for markets. But let's see how that plays out. James, let's move on to you.
Obviously, pretty good out of consensus call on sterling. I would say you're sterling at the lows here. But, you know, I think we've got other stuff going on in Nokia, for example, where you've had a fair bit of fund performance this week and Swiss weather.
I think that you've slid out a bit. You know, you know, you've obviously been a bit more bearish on it. But any updated thoughts after this week?
Yeah, sure. So I think with sterling now, the focus is on next week. We're going to hear from Burnham.
There's also the ongoing issue of the chancellor. And I think our message is that there's potentially going to be a bit of a lack of detail. And so to get the long end of the UK curve to worry about this just yet, we think it's a little bit early.
You could also have, as you were saying before, Mira, some of the benefits of the lower oil price feeding through to, say, the UK PMIs or some of the other UK data. I just think with Burnham next week, there's going to be a lot of talk of devolution policy, a bit more weight on local governments trying to advocate localism. And I think, you know, given the advisors he has around him, you know, there might be talk on flexibility on fiscal rules, but I don't think it will be something we hear a lot of detail on.
And so there's potential for the market to kind of fade any immediate knee-jerk reaction there. And on the chancellor, you've seen betting markets this week raise probabilities for Ed Miliband to be chancellor. We've been playing this down slightly.
I think in terms of fiscal risk premium, I think more of the danger actually comes from Burnham himself rather than rather than Miliband. And, you know, this is something we can worry about closer to the budget. But, you know, through July, I think it's going to be a bit more difficult, given that, you know, the political timeline is still playing out.
They won't want to provoke a large market reaction. So, again, a kind of knee-jerk reaction there. I think the market will end up fading.
You point out Eurosterling, Mira, I know, you know, you've been a bit reluctant for me to talk about the voodoo technicals on the charts. But it is a pretty key level around, you know, 8620 that we've appeared to have modestly broken below. I think if we can make further headway, it starts to look interesting there from the downside, from a squeeze of positioning perspective.
But from a fair value perspective, if you do think the market calms down a little bit on the politics, fair value, you know, Eurosterling typically trades around one or two pence cheap when that happens. And that puts you on an 84 handle. So we're constructive sterling versus the low yielders, things like Stocky, Swiss, Euro.
For Noki, fair value on Euronoki is up at 1140 now. You know, there's, you know, on the simple models, there's a little bit of adjustment still needed. Obviously, oil has come down this week.
That's been an issue. I think the dollar strength has been an issue for Noki as well. Norja's pricing is, does have around 15 basis points in for August now.
So there's a real chance of a hike there. And if you think oil can stabilize, we can, you know, potentially, you know, normalize on some of the fair value metrics. And we have inflation in a couple of weeks time, which could line up an August hike.
There's potentially a picture there where Noki can start to stabilize. We'd particularly look for that versus Stocky, you know, to be pair specific. But yeah, it is notable that we've had an Noki underperformance.
And as I say, I think that's oil and dollar driven. For Swiss, it's interesting how the debasement trade or lack of debasement trade has kind of gathered pace. Gold prices come off, you know, that you're thinking about orthodoxy and the Fed and what that does to the debasement trade.
And I think, you know, you look at some of the typical drivers for Euro Swiss, Swiss being an alternative, alternative reserve asset. As oil has come off, you look at the copper gold ratio is now implying Euro Swiss around 95. So I think that that adds to some of the weights on Swiss.
I'm a bit concerned by what I saw in the QMI data and what we mentioned before for Stocky in terms of impact on Swiss. But we are, you know, preferring the funding in Swiss to on a global basis, you know, versus currencies like Aussie dollars are rather than European specific, which I think can hedge out some of that European growth risk. And as you say, Mira, a lower oil price could mean there's a trade off in growth over the short term where oil is able to help out Europe a bit over the next couple of months.
OK, thanks a lot, James, and throwing some voodoo technicals in there as well. But let's wrap it up there. We're taking quite a bit of time already.
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