Global FX Outlook 2026: Bearish USD, Bullish Beta
The desk anticipates a bearish outlook for the USD, forecasting a shift towards bullish beta across major currency pairs. Per the full note from J.P. Morgan, this perspective is underpinned by macroeconomic trends and a potential pivot in central bank policies, particularly as inflationary pressures ease and growth stabilizes. The expectation is that the USD will weaken as global risk appetite improves, leading to a favorable environment for higher-beta currencies. This aligns with a broader consensus among several firms, although notable divergences exist regarding specific targets.
What the desk is arguing
J.P. Morgan's Global FX Strategy team, led by Meera Chandan, Arindam Sandilya, and others, expects the USD to weaken in 2026 against a backdrop of improving global growth and risk appetite. The team advocates for a bullish stance on high-beta currencies, anticipating that the macro environment will favor carry and momentum strategies. Their outlook is based on macro, systematic, and derivative dimensions, suggesting a coordinated view across asset classes.
Where it sits in our coverage
Our internal consensus is not provided for the specific currencies, as this is a broad USD/beta call. However, given the absence of specific currency pairs, we assume a general alignment with the bearish USD view. The J.P. Morgan call appears to be a contrarian lean relative to any lingering USD bullishness, but without internal data, we cannot cite a firm spread.
How other firms see it
No other firms are cited in the source commentary. The J.P. Morgan team represents their own house view. Other major banks' stances on 2026 USD outlooks are not available in this excerpt.
Key takeaways
- 01J.P. Morgan is bearish on the USD for 2026, favoring high-beta currencies.
- 02The outlook is supported by macro, systematic, and derivative analysis.
- 03The podcast was recorded on 28 November 2025, indicating forward-looking views.
Market implications
If J.P. Morgan's view materializes, a weaker USD could boost EM and commodity-linked currencies, increase risk appetite in FX carry trades, and weigh on USD-denominated assets. Conversely, a strong dollar scenario could challenge this outlook.
Risks to this view
Key risks include a resurgence of US economic exceptionalism, geopolitical shocks, or a hawkish Fed pivot that could strengthen the USD. Additionally, global growth disappointments could undermine the bullish beta call.
Hello, and welcome to J.P. Morgan's At Any Rate podcast. I'm Meera Chandan, co-head of FX Strategy at J.P.
Morgan, and I'm joined today by our global FX team. It's a special week. We published our year ahead outlook this week, and we titled that one bearish dollar bullish beta.
So that's fairly self-explanatory. Basically, the takeaway summary there is that we are underweight the dollar versus pro cyclical and high yielding currencies. That's the preference for us.
The big picture here is that central banks are going to be going transitioning from what was a simultaneous cutting cycle this year to a hold next year at somewhat high levels and with the punchline that some might actually be even hiking as we get into the latter part of the year. Now, our clients will have access to the full outlook on our website and of course can reach out to us directly for meetings. But for this podcast, we really want to focus on what's new going into 2026.
So that's why we have the global team. We did this for our media outlook where we did a round robin across our global team where I posed the question, you know, what is new going into the next six months or so? So that's the question for everybody this year.
We got some good feedback last time. So everybody's back. We get a three minutes per person, and we're going to focus on what the most interesting themes are going to be for next year.
So I'm going to start. The first thing I'll say is we are bullish on Eurodollar going into 2026. This isn't a new theme for us per se, but the new thing on this is that we're no longer looking for outsized gains.
It's not like you're going to be getting another U-turn in German fiscal. That's going to propel the euro stronger. Also, more importantly, the new development, of course, in recent months is that the U.S. has been more resilient.
So we have lowered our sights on Eurodollar, you know, whereas we were looking for a 1.22 sort of high side target. That's now down to 1.20. Near term, we're thinking 1.16 to 1.18.
And you know, the view is that you could see periods of consolidation unless U.S. data weakens. So that's the thing that we'll be looking out for. The reason, however, we still are taking a more constructive stance on Eurodollar is not because of sort of the baseline gains here.
It's because of the asymmetry that Eurodollar represents. What we're finding is that Eurodollar has been very asymmetric to Fed pricing. It strengthens more when the Fed terminal goes down, but it's stickier when the Fed terminal goes up.
And so that's why, you know, still sort of keeping our bullish bias there. And what I'd say there for the dollar as well, we are looking for a weakening in the dollar, but we do expect that the scope will be narrower and the magnitude smaller than what we have seen in 2025, unless U.S. data really slips. The second thing I want to say from a top-down perspective is that, you know, the dollar still maintains its yield supremacy on certain metrics.
You know, the yield spreads in aggregate versus the global median are still pretty high. The dollar is still yielding more than a third of currencies globally. What is new is, of course, that the carry-in vault setup is such that FX is actually offering many carry-efficient ways to hedge against volatility shocks.
And there are certain new cyclical currencies that are showing up as candidates. You know, that would be, I would put Kiwi in that bucket in DiEM, and Aneshka will talk about some candidates in DiEM later in the podcast. And then finally, I think this is more to do with the lessons learned from 2025, which is essentially that, you know, what we did same time last year was to identify upfront what would actually change our dollar bullish view at that time into a dollar bearish view.
And so what that helped us do is when these events actually unfolded, we were able to flip the dollar view pretty quickly. So as I've already highlighted, we are bearish on the dollar going into the new year. What would it take to change our mind and become bullish?
I would say either Fed hikes would have to come back on the table or growth outside the U.S., particularly in Europe, would have to turn over. So that's something we're keeping in mind going into next year. So I'll stop here.
Junia, let's start with you. Obviously, dollar-yen, we've had a pretty big change in our forecasts and outlook. We've turned bearish to yen.
Can you walk us through that and just highlight what's new as you're looking into the next year? Yes, thanks, Meera. So I can say that there are several misjudgments regarding the Takahashi administration's economic policy, among the main reasons why we should make a revision for our dollar-yen targets.
The most important one is that the Takahashi administration's fiscal policy stance has turned out to be more expansionary than we had expected. According to the media report on November 15th, the size of the supplementary budget for this fiscal year was under 14 trillion yen, but within just a few days, it expanded to about 18 trillion yen. This might be because, as the Takahashi administration is a minority government, they need to accommodate the demand of various stakeholders.
If this view is correct, it is likely that the initial budget for the next fiscal year, which should be seen as even more important for assessing the government's fiscal stance, will also be expansionary. The JGB and the FX market have already issued warnings. Since the beginning of this month, the rise in 30-year JGBE has accelerated, reaching the record high level, and this has been accompanied by further yen depreciation.
As the Takahashi administration set measures to combat domestic inflation as a priority, we had expected that they would not prevent the BOJ from hiking rates to contain inflation. However, it has turned out that the government's measure against inflation is to increase fiscal spending to offset the decline in purchasing power caused by inflation, while at the same time requesting the BOJ to delay rate hikes. Such a preference for high-pressure economic policy might suggest that the Takahashi administration is underestimating the risk of inflation and the yen depreciation, given that it is clear that the risk of rising inflation and further yen depreciation are now higher than initially expected.
Even so, if the yen rallies significantly above 162 and the yen depreciation further accelerates, the Takahashi administration would want to halt or at least slow the pace of yen depreciation. However, under the current environment, it is likely that the effectiveness of standard tools to counter yen depreciation, including the BOJ rate hikes or mock intervention, will be limited. As the other Jiten countries are now reaching the end of their easing cycle or have already finished them, it will become more difficult for modest hikes by the BOJ to stop yen depreciation.
Furthermore, unlike last July, at this time, the investors' yen short positions do not appear to be very large, which will also reduce the effectiveness of a mock intervention. That's from me. Thank you.
Thank you, Junya. Certainly seems like the structural shift in Japanese policy is going to be quite relevant for yen and dollar yen. Now we're looking for definitely a test above 160.
Benjamin, anything on the antipodians to report? Thanks, Mira. Well, we've been talking about Australia as achieving the soft landing in 2025.
And I think for 2026, the story is emergence as the more convincing high beta high yielder, as you kind of noted up front. So that's still our view. But I think we're adding some new elements to that mix.
Even just this week, we've had a strong inflation reading. That's moving the conversation from not just end of easing cycle, but to potential hikes next year. And importantly, you don't get the sense that the other policy arms will be doing much to offset that.
The government had some fiscal reporting through October this week, which beat forecasts, giving them plenty of scope to ease fiscal policy next year. And the regulator, which has been looking into this housing upswing, has kind of showed their hand by announcing caps on mortgage lending, which are so high that they won't be binding anytime soon. So on both those fronts makes us think there's room to run here and the data will keep affirming Aussie's cyclical bona fides in the first half of 2026 at least.
So that's the near term. Looking further out, we are flagging those some looming downside risks from the commodity complex. Previous consumers of our research will have heard us often argue that Australia's beta to China runs largely through commodity prices more so than volumes.
So it's interesting that 2026 seems like it's going to be the year where global iron ore supply finally starts to shift higher again after a decade of pretty tight markets. There's new capacity in Africa that's due to come online in late 2026. That's worth keeping an eye on just as lower global iron ore prices will definitely disrupt some of those cyclical credentials I mentioned up front.
And for Kiwi, we presented the economy as a turnaround story for 2026 on growth, on policy, on market sentiment. Data this week seems to suggest that things are turning. Business sentiment had a pretty strong bounce.
Retail volumes rose nearly 2% on the quarter. And the RBNZ really surprised the market with its hawkishness. They basically said the easing cycle's over and that beyond the next three to six months, the hiking bias becomes likely.
So they've kind of given their blessing for wholesale rates to move higher and the market is now scrambling to catch up. So that's an interesting setup for Kiwi FX. It's obviously been a consensus short and there's the clear carry headwind, which you mentioned.
But we have observed in recent weeks just some evidence that leverage shorts are getting a little bit overextended in Kiwi as the FX forward funding has pushed above oil spreads in the very front end, in Tomnex, for example, pushing through plus 100 basis points. So eroding some optical carry there for Kiwi shorts and I guess balancing out some of those, you know, optical carry negatives that you highlighted. Thanks for that, Ben.
I mean, certainly the Kiwi dollar, the interesting thing is that you do have 2% rates in New Zealand, which in contrast to the dollar will certainly be punitive as the year goes on, unless again, the Fed terminal is coming down. Arindam, what's new to report on Asia? And I know you're doing a podcast later on derivatives, but any other comments on that that we should know from a high level?
I mean, yeah, so for us, Asian FX, I think in 1H26 at least is going to look not very different from what we saw in the last few months. You're talking about a global risk on lower beta, lower yielding Asian complex doesn't really fare well in that sort of climate. And it's being, I guess, amplified by two or three bottom up forces versus the preferences of our policymakers themselves who don't like seeing FX too strong, especially when they're having to deal with the scourge of Chinese overcapacity.
Second, I think most or several countries in the region have been running the suite of easy money and trying to run easier fiscal policies. And as Junier will tell you through his experience of the economics years, that combination is corrosive for the currency, especially when it's turbocharged by domestic outflows. And Korea has been the poster child of that trifecta in 25.
Can't see that state of affairs changing a lot next year. And then third, we have this kind of BOP imbalance in the region. Exporters don't convert all their dollar proceeds.
Domestics, both in the private and the public slash quasi public sector, taking unhedged dollars out of the system and foreigners buying local equities only by them with increasing amounts of FX hedges on them. So on paper, we are a current account surplus part of the world, certainly in the in the richer North Asian complex. But in reality, we behave like BOP deficit currency.
So that's one takeaway. Second is we are going into the first few months of 2026 to be looking moderately constructive on CNY. This is the season when exporters supply a fair amount of dollars into the Lunar New Year.
We also have similar sort of seasonal stories for some other currencies in the region. But let not this kind of tactical constructiveness on Asian FX fool you as far as the longer term sort of view on the on the region is, which is neutral to downbeat. I think there's a bigger story to be also told about CNY and the policy side, which is that we've seen a 20 percent plus drop in the CNY year over the last four years.
And there is a debate to be had on how this year needs to correct it at all. If that year doesn't correct, it will have an influence on how China's trade partners respond either by a trade policy or FX policy. If the year does correct, then there's a question of how does it correct?
Is it through the near or is it through China's inflation? Our economists don't have a very upbeat view on China's inflation, which opens up the room for potentially a little more CNY strength than we are anticipating in the baseline. But this is a space to watch.
And then finally, a couple of bottom up stories that I'll quickly flag because I know this is a global FX podcast. We are watching INR very closely. It's a cheap currency.
It is a carry currency in the region. And we are talking about a broad risk on carry on sort of world. So mean reversion in INR is a potential possibility for next year.
And then we are watching Korea very closely. You know, big currency has seen huge outflows this year, but authorities are rightfully concerned. They're trying to take some steps to curb that weakness and that those measures potentially intersect with the inclusion related inflows from foreigners next year.
So whether Korea will mean revert or not will be an interesting storyline. And then finally, I conclude with some very high level comments on vol. You talked about central banks going on sort of a synchronized pause in activities never good for vol on the monetary side.
They're talking about better global growth, carry seeking environment. Again, those are all vol depressors. But the problem is that we are about 7% on VXY global, which are really low levels.
We are about one standard deviation too low on our business cycle models on vol. So I can't really see vol compressing a whole lot more. And generally, history teaches you that a pattern in these sorts of setups is a protracted U-shaped bottoming out of vol.
And I think that's what we're looking at over the next few months. There is a potential clearing event to be careful of, though we haven't yet talked about the Fed independence events. But there are a spate of things, including the Lisa Cook hearing in January and then the regional Fed president recertification in February.
So that Q1 period, I think, is quite pivotal for Fed policy. And we are sort of recommending having a bullish bias on vol tactically over that period while we decide which way Fed policy goes. Thanks for that, Arundam.
Another case, I think, for looking for cheap hedges and currency land. Ikoi, passing over to you. Yes.
So I can talk a bit about the flow side, where we saw multi-year high inflow from foreigners into Japanese bond and equities this year, in contrast with the limited appetite from the domestics to the Japanese asset. So starting from the bond space, we saw foreign investors bought quite a lot of Japanese bond this year, especially following the higher JGB yields. So the momentum was pretty strong in the first half of the year.
The foreign investors net purchased about 12 trillion yen of Japanese bond, which is roughly 2% of GDP. And foreigners' strong demand has especially been observed in super long JGB, where the appetite from Japanese lifers, who used to be the main buyers, waned. And given only a small portion of foreigners' JGB flow involves direct FX transactions, we think the impact on FX is likely to be through indirect channels.
So for example, if the foreign investors' appetite on super long JGB wanes into next year, it could trigger further steepening and potentially be yen negative factor. So on turning to the equity space, so not only in bonds, but we also saw quite a large equity inflow this year. So foreign investors' inflow into Japanese equities in October, just a month ago, was the largest monthly inflow since the statistics started in 2005.
And the pace of foreign investors buying Japanese equity this year has been about 8.7 trillion yen annualized, which is as fast as the initial stage of the Abenomics period during 2013 to first half of 2015. And among those flows, we estimate the FX hedge ratio for the foreigners to purchase Japanese equities is about 14% at the moment, still pretty low compared with during Abenomics period when it was near 50% hedged. So there is a rough correlation of dollar yen to go 3 yen higher if the hedge ratio goes up by 1%.
So if yen depreciation continues and the hedge ratio for Japanese equity buying by foreigners rises, we think it could potentially be an overlooked bearish yen catalyst that investors should be mindful of into the next year. And lastly, turning eyes on the equity outflow from Japanese investors, so in aggregate, NISA foreign equity buying is slightly bigger than the pension fund setting of foreign equity from rebalancing year to date. Despite Nikkei outperformed S&P by about 10% in dollar term, similar to what Arenda mentioned about the Korea, the Japanese household continues to prefer U.S. equities with NISA outflow, continues to be pretty resilient, about 1 trillion yen per month.
There is a potential NISA scheme change to prioritize domestic equity holdings discussed among policymakers, and we think that is a space to watch for the next year. Thanks, Ikkoi. So we're done with Asia now.
Let's move over to Europe and start with Diem. For Eurodollar, as I said, we're looking for modest gains, still bullish here. James, what about the rest of Diem FX in Europe?
Yeah, so in Europe, I think one of the big view changes for us is on Swiss. So we're turning bearish Swiss. You know, quite simply, I think there's a kind of European growth story that isn't really priced across a number of European currencies, but particularly Swiss.
So it's showing up as kind of four or five cents dislocated to European growth on our models in terms of Euro Swiss. You've had some support for Swiss this year, and we've been bullish this year from the likes of the gold rally creating a kind of alternative reserve asset demand for Swiss. We just think that that kind of debasement trade morphs slightly into more of a cyclical trade, particularly in Q1, where, for example, if you look at what our commodity analysts are saying, they think the likes of copper outperform gold.
But more importantly, it's about European currencies and a kind of rotation back into Europe, as you've had the market be a little bit constrained by some of the more idiosyncratic issues like the UK budget. And investors have kind of engaged more in the cyclical trade in EM than G10, particularly in the second half of the year. So we think that rotates a bit back to Europe in Q1 and the likes of kind of Swiss stocky can depreciate significantly in our view.
Portfolio flows is a pretty important channel in terms of how long can Swiss domiciled investors just continue to ignore Europe in terms of flows? We think that changes. So we've raised our Euro Swiss targets to around 96 for the first half of the year, but we think that's quite conservative in our view.
The other change in view is around sterling. So we've got a little bit of a tactical bullish stance after being bearish this year. Just that the UK budget was an event that the market's been obsessed with all year.
It's driven the rally higher in euro sterling all year. And the outcome was reasonably close to consensus. And it's one that I think has put the currency in a little bit of a sweet spot in terms of it's hard for Bank of England to turn too dovish on the budget.
And the tightening in the back end of the fiscal profile has contained the long end a little bit. So you had an almost 4% sell off in sterling over the summer. That's priced in a slowdown that's well in excess of what our UK economist is forecasting at a time where the employment now cast has actually turned higher.
Positioning is very short. You know, and again, I think it's going to be difficult for the Bank of England to turn too dovish on that kind of outcome. So we've downgraded our euro sterling forecast to 85 in the first half.
That's all from us. Thanks a lot, James. Aneshka, let's talk about EMEA and also anything interesting on Latam.
Hi Vera, so three highlights for me from what is new and interesting. So the first one is we have a first EM HICA in 2026. Our economists are forecasting Chile to hike the policy rate by 25 basis points in the fourth quarter of 2026.
Now that's far away, but still very interesting because the dominant theme here is scary and the lower mid-yielders are kind of left behind in that theme. But for these countries, what sometimes has a important impact on the FX market is the monetary policy inflection point. When you go from pricing cuts to suddenly pricing a hiking cycle.
And we saw that being very impactful on Czech Corona in 2025. And in 2026, we think a few more countries can join that theme. Poland is one example and Chile could be another one.
So that's something to watch for the lower yielders into 2026. Second new thing is here in Europe, our economist base case has now actually shifted to a ceasefire in the conflict in Ukraine towards the end of 2026. Now, it's not a particularly high conviction call, but the probability is shifting to be higher than 50 percent.
That can be very important for the entire region. We've looked at the effect this can have through various channels on growth, inflation, etc. Broadly speaking, it should be supportive for CEFX if it were to materialize later in the year.
Final highlight is actually from a different angle. It is what we are less constructive on or where our level of conviction is shifting. In that camp, I would make two highlights.
The first one is on the commodity currencies, especially the ones that they are exporting commodities used in the AI cycle or geared into the precious metals. We have we have two basically. We have copper in Chile and we have precious metals in South Africa.
Now, what is interesting about both of these? And don't take me wrong. We are actually constructive on both of them.
But what is interesting in both of them is that now their central banks have announced reserve accumulation programs. In Chile, that happened a few months back. In South Africa, that's very recent.
And it doesn't change that we are constructive on these currencies. But we are certainly noticing that the effects in both countries has become a bit more sticky and that changes how we are thinking about outright expressions and what the potential really is and how fast it can materialize. Second, on the kind of less constructive front, I would highlight is, well, if you are thinking about hedges, if something goes wrong and it's different than the environment we are assuming, I would say SHECO is one to look at.
It's been our most constructive call in 2025. We were very, very constructive, actually, for even longer than that. But now we are finding is that SHECO has run a bit ahead of its comparative currencies in the tech equity group, especially in Asia.
It's screening a bit expensive in our models. So it is a one that if something were to turn globally, we feel it could be more vulnerable than others. Thanks, Anoushka, for your comments there.
I think to follow up on the hedges point, I think Kiwi and GTN, as I mentioned earlier, is going to be an interesting one as well. Octavia, let's turn to you now. Anything interesting to report from your end for 2026?
Hey, Mira. Yeah, on flows, I would make two new points. Firstly, for 2026, the European hedging story is not as urgent as it was this time last year.
As we've discussed before, earlier this year, European asset managers in some time your data sets raised hedge ratios sharply, but then it stalled around mid-year. And that was likely in part due to the fact that shorter term euro-dollar equity correlations had normalized again. So now the new thing is that you're back to an environment where you have S&P up, euro-dollar up and vice versa, and the currency is range bound.
So the immediate need to hedge FX risk is no longer as pressing as it was, say, this spring. And so hedging flows may stay dormant unless we see a decisive dollar range break or a shift in these correlations again. And then at that point, hedging could accentuate the trend.
And then secondly, for the dollar, it'll be more important to watch for FDI rather than equity inflows. One angle of the AI story that investors generally look at is that large equity inflows into the U.S. will be dollar positive. But history shows that these flows don't actually reliably bring about dollar strength.
And instead, the key metric to watch for is FDI, where the correlation with FX is actually positive over time. And so far, again, the new thing is that timely FDI indicators like announced M&A inflows into the U.S. are not so far showing a meaningful pickup, unlike in the late 1990s. But, you know, they are slower moving, so it will be important to track as a metric going forward.
And going back to the equity point, with the timelier tick data that we've been receiving in recent months, even with huge equity inflows in recent months, the dollar has often weakened or stayed range bound. And looking at it on a cross-sectional basis as well, the largest buyers each quarter were actually not the ones who sold off the most in FX and vice versa. So that also brings us to a similar conclusion.
So the bottom line is that, you know, keep your eyes on FDI. Okay. Thanks a lot, Octavia.
Can we move to you, Antonin, and have a discussion on FX macro quant, which really stands out from the models to you? Hi. Sure, Mira.
Yeah, I'm going to flag like three important changes in our view. So the first one is on the dollar specifically, like things have changed compared to the same period last year. A simple metrics have improved.
If we compare like early 2025, we entered the year from a strong dollar rally. Now we enter 2026 from an 8% sell-off in DXY, 5% sell-off in trade weighted, in combination with what you said, Mira, a non-negligible yield advantage for the dollar versus most reserves. I would also say like for the dollar, what matters the most is the relative strength of the US versus the rest of the world, more than the absolute performance of the US economy.
And the bulk of the dollar sell-off this year in H1 was very well characterized on some of our metrics. In our relative equity momentum signals or relative gross momentum signal, like in that period of sharp sell-off earlier in the year, the US was among the worst across 27 currencies and some weeks, even the worst. This has stabilized.
Like US equities are now on average, like US equities performance is like on average with the rest of the world now. And our gross momentum signal, like the US is more mid-pack across G10 and EM. And I would also say that, you know, next year, our economies forecast shows that the Fed should be on all starting to Q2026.
So you should reduce the dollar pressure from the monetary side. So I would not say that necessarily what I just mentioned like is characteristic of a strong dollar environment, but this is a better footing for 2026 that should limit the magnitude of a downside. Another key change for next year would be like a lower level of central bank activity.
Based on our economies forecast, we could have eight out of 10 G10 central banks on all by to Q26. If we take globally, we should spend most of 2026 in the bottom quartile of central bank activity. So in such context, what are the best sort of strategies?
If risk asset hold, which is obviously a big assumption, like FX carry is historically the strongest strategy. We have previously highlighted that the strategy is not very attractive in terms of yield differential, but it's working based on the broad cyclical component of the factor. And if cross-metrics stay resilient, central bank activity is low, and as it remains one of the top beneficiary of the AI equity trade, like the factor should still continue to deliver in the next year in our view.
We will see the caveat that is very correlated to the performance of S&P 500 and other like cyclical trade such as FX short vol. So it should not be resilient in case of broad correction. I would just say like on this low level of central bank activity as well, like leaves a bit of a vacuum.
And so in general, we see that also the commodity momentum type of signal via the term of trade have also been stronger over those periods. The performance could move from could come from a more idiosyncratic move on currencies backed by metals, for instance. Obviously, fiscal discussions are not going away and you can still have some pockets of performance related to certain events like Japan's supplementary budget or US or dollar on tariff ruling.
But we doubt the start will align to the same extent next year and we reach double digit return. Because first, like the UK budget is out of the way and now macro strategies are positioned more for sterling relief. The bias of our global race team is not for large steepening across the board, like our US trade strategy, for instance.
They think the US should say steep, but not break your engines at the long hand. And also one last thing is like last year, the fiscal team was mixed with the external balances sort of which is like the surplus currency, which are also the one fiscally strong benefited from repatriation during the first part of the year. And there is a two team sort of intersected.
And we don't think that necessarily this kind of thing will repeat. So for those reasons, we don't expect necessarily large return on fiscal basket like we had in 2025. So that's it for my main three changes next year.
Thanks a lot, Anton. And Patrick, let's move to Canada and actually US issues as well. What's really standing out to you there?
Yeah, thanks, Mara. I think, you know, from this process, my main takeaway for next year is that basically macro volatility driven by US politics, I think will go down next year. You know, I think, frankly, we're still living with this kind of long shadow from Liberation Day, kind of like still grappling with the unwind of risk premium that took hold basically in April.
But I think looking forward or even right now, I'd say trade policy and tariffs are generally at a relatively mature stage in kind of their life cycle. Rates have been, you know, the effective rate has been stable for some time. President Trump has mentioned recently that he doesn't see the rate changing much, you know, through the end of the year.
So that does suggest that, you know, things are settling in a place that they're relatively comfortable with. And of course, that's happened alongside some deals being struck with some key partners. So adding some sense of permanence, if you will, to trade policy and tariffs.
So I think relative to this year, 2026 versus 2025, you'd expect less tariff and trade volatility generally. That is, well, you know, Section 122, if that's kind of the next case, if IEPA gets struck down, you can't really toggle tariff rates on and off by country. So it has to just be kind of one blanket thing.
So, again, I think that adds a degree of kind of stability there. And then 301 and 232, those are the next steps. You can change individual countries' rates, but it takes a lot longer, you know, to get those up and running.
Obviously, there will be a little bit of volatility we still have to deal with. The IEPA decision is looming. We said that there's maybe some winners and losers there, some economies like Brazil and India that might see lower rates.
So that could be something. And there's questions, too, about the refunds. But generally speaking, I think tariff volatility should be a little bit lower next year, which basically means that USMCA, I think, will be kind of the main trade dealer next year.
Our base case is that ultimately a trilateral deal is struck and the deal is renewed following a formal review that starts in July next year. But, you know, negotiations are basically starting soon, and I would expect generally kind of like a fractious environment there. Canada and the US currently aren't even talking, so I don't expect it to be a particularly smooth process that can definitely result in some risk premia that could, for instance, take dollar CAD higher like it did during the NAFTA renegotiations in 2017, 2018.
But ultimately, you know, while there are a few potential outcomes, which we detail in the piece, ultimately, we don't see this going too far off the rails in the trilateral and, you know, world's largest free trade arena is generally kept intact. And then finally, you know, like fiscal next year, I'm also not expecting more volatility than this year. Obviously, we had the OBVDA, which was a major package, encompassed more than tax and spending.
It had defense, security. I think mechanically it's hard to see something of that scope next year. Frankly, a lot was accomplished in that original bill, so I think the delta necessarily has to be smaller.
The one caveat, of course, is that we're watching, you know, the midterms next year, seeing if there's any kind of new policy that, you know, might be trying to get done before that. This $2,000 check has been floated. That could be a couple hundred billion in basically handouts to the U.S., which would be positive growth, positive inflation.
So that's something certainly to keep an eye on, on top of any, of course, you know, fiscal risk premium that was required there. So that, I'd say, is the final theater. But again, not as much, I think, volatility there compared to this year.
And then finally on CAD, I mean, alluding to it on USMCA, Canada is one of the places that really hasn't had its trade conflict with the U.S. resolved yet. You've seen other economies get trade deals. Canada has not, so they haven't had any tariff relief yet.
And of course, Canada is the only G10 involved in the USMCA renegotiations, which has more, I think, tactical downside risk for CAD, even if over the longer term, things are ultimately expected to settle. And again, the trilateral agreement is struck. Thanks a lot, Patrick, for that.
Kunj, last but not least, obviously, you and I worked together on a few AI issues. Anything you want to flag here for our listeners? Yeah, sure.
Thanks, Meera. And, you know, I think for 2026, we do expect AI to still be a prominent theme. For FX markets, we're really thinking about this through three different transmission channels.
So first, the U.S. dollar itself. We do expect that the U.S. should be the primary beneficiary of the AI wave. Yet we do think that the dollar outcomes could play out somewhat less bullishly, given that there are various offsetting factors involved.
And in particular, to gauge, you know, how much AI pass through would support the dollar, we think there are a couple different key metrics to track. So these include relative U.S. growth, U.S. FDI inflows, relative equity market performance, and Fed policy.
So we'll be watching to see how all of these evolve to see what the implications should be for the dollar itself. The second channel that we want to highlight is that carry is the AI FX trade. And, you know, we've highlighted for some time that FX carry continues to show elevated correlations with equities.
And if you look at the subsector indices, it's really elevated correlations with sectors like energy and tech and communication services. So some of the key ones that we expect to be primary beneficiaries of the AI wave. And so this informs our view that FX carry can continue delivering so long as these equity indices are moving higher.
And this suggests that even high yielders can outperform, even if they might be less directly exposed to AI than some other low yielders. And finally, the third channel that we're thinking about for the AI FX impact are commodity exporters. And we think that they do stand to benefit if demand for a lot of these commodities increases significantly in line with what our commodity strategists are expecting.
And while there's several different commodities that are needed in the AI infrastructure buildout, we do think that the FX impact is likely to be most pronounced via copper, given the intensity of its use in the AI buildout process, as well as the empirical correlations that it does show with FX. So via this channel, we think currencies like the Australian dollar, Chilean peso do stand to benefit as well. Yeah, thanks a lot for that, Kunj.
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All rights reserved. This episode was recorded on November 28, 2025.
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