The desk interprets the recent employment data as a mixed signal for the FX market, impacting major currencies such as the yen (JPY), British pound (GBP), and the Hungarian forint (HUF). Per the full note from J.P. Morgan, the employment report lacked clarity, presenting limited direction for these currencies, which could be beneficial for traders focusing on volatility. While a positive labor market generally strengthens currencies, the mixed results suggest that significant market movement may be stymied as investors weigh uncertainty. Overall, the outlook remains cautious but open to opportunities in Japanese and Eastern European currencies.
What the desk is arguing
The desk believes that the mixed employment report creates a complex backdrop for the JPY, GBP, and HUF, suggesting increased volatility without a clear directional bias. Per the full note from J.P. Morgan, the data indicates that while employment growth continues, it does so at a slower pace, which may impact the approach of central banks in terms of policy decisions.
Furthermore, the outlook for JPY hinges on Japan's monetary policy stance, especially considering recent shifts in the Bank of Japan's language towards inflation and yield control measures. A lack of definitive trends may encourage cautious trading in these currencies as stakeholders remain vigilant for clearer signals.
Where it sits in our coverage
Our consensus target for the GBP/USD stands at 1.075, reflecting a narrowed range from 1.04 to 1.12. Specifically, jpmorgan projects a 1.10 target for March 2026, indicating a moderate bullish stance, while bofa holds a more bearish target of 1.04 for the same period. This divergence reflects a broader uncertainty in currency direction, with the desk's view leaning towards the higher end of expectations.
How other firms see it
Major players like jpmorgan align with a slightly bullish perspective, while firms like bofa present a contrasting bearish outlook, forecasting cautious movements driven by economic indicators. This discord suggests a market caught between optimism and caution, reflecting mixed sentiment among analysts.
Traders might want to closely monitor movements in USD/JPY, which may exhibit spillover effects from shifts in employment metrics and central bank maneuvers. The fluctuations in HUF amidst regional economic developments will also be noteworthy as they unfold alongside the updates from the UK and Japan.
01The mixed employment report introduces uncertainty for JPY, GBP, and HUF.
02Strong employment growth may not lead to immediate bullish currency trends due to mixed signals.
03Market participants should prepare for increased volatility in these currencies.
04Focus on central bank policy directions in response to ongoing economic data.
Market implications
Traders should remain vigilant for breakout levels around 1.075 for GBP, as this could signal the next directional move. Additionally, upcoming comments from central banks may prompt shifts in sentiment, especially for currencies like JPY and HUF, where policy adjustments are keenly awaited.
Risks to this view
A dramatic change in central bank policy or an unexpected major economic indicator release could rapidly alter the current outlook, pushing these currencies to test lower bounds or break resistance levels previously established by the employment data.
Hello and welcome to J.P. Morgan's At Any Rate podcast. I'm Meera Chandan, co-head of FX Strategy here at J.P.
Morgan, joined by Arindam Sundelia, who's our other co-head of FX Strategy, joining us from Singapore. And then we have senior strategists joining us from the DM side, James Naligan, and EM side as well, Mike Harrison, with a specialty in senior local markets. So well, we're recording on a Thursday, we'll be putting this out on Friday.
We've had payrolls report just come out and I have to say it feels like a mixed bag here. Something for everyone. Arindam, what do you think?
Yeah, very much so. Clearly the data is on the weak side. So unlike this time last month, the data gave it and now the data has taken it away from our dollar call.
So just looking at the headline, pretty clear that we've had a downside miss. Our economists have been hinting at the idea that the three month moving average of NFP around 188K last month was probably overstating the strength of the job market. And that number has now come down to 111K after today's report.
I think that's probably closer to the true reflection of the strength of the labor market, which our economists have been pegging at around 100K jobs added per month. There are some notable distortions in the data. So last month, for example, we got a bump out of the leisure and hospitality sector.
This year you had a net contraction of 61K jobs in that very same sector. There is some noise in the market about whether this is related to work or related hiring. Our economists don't think so.
They think this has got probably more to do with seasonal adjustment issues around summertime job creation. But be that as it may, I think the other notable part of the report was the slide dropping the unemployment rate to 4.2 unexpectedly. But this again comes alongside the drop in the participation rate.
So this is not an unalloyed positive either in terms of your reading of the report. So NetNet can't really blame the rates market for doing what it did. It took back five to six basis points of rate hike instead of July pricing.
So I'm guessing that a July Fed hike that, somewhat surprisingly to me, several people had mentioned to us on our mid-year outlook marketing trail, now looks more or less off the table at this stage. December 26 pricing is also one and below 30 basis points. The dollar has followed suit to be down about between 0.8 to 1% versus most of the majors.
The point that we have been making on the dollar is that this fall was data dependent all along. The data sometimes zags before it zags, was never likely to be a complete straight line path high on the DXY and so it has proven. But I think on the whole, I still have conviction on the house call that the U.S. labor market is on a strengthening path, I think along with sticky inflation, it will force a reasonably serious conversation on Fed hikes at some point later in the year.
And let's see, there are still two more employment reports to go between now and the September FOMC. And a further judgment on the state of the job market may have to wait until then. The one thing that we have learned, as you recall several times in previous years through hard experience, that it's not generally a good idea to extrapolate the immediate post-non-fund payrolls price action to even a day or week after.
So I think maybe we reserve our judgment on how far this can push the dollar weaker till we wait a couple of days at least. But on the day, the data is what it is. So I think the price action is fairly self-explanatory and almost a mirror image of last month.
The last thing I'll say is that, you know, in our media outlook, we have said the core view is bullish risk or bullish beta and bullish dollars. And a day like this, price action like what we've seen after NFP probably shows you the wisdom of that barbell construction. Not every day will your dollar piece and the risk piece cancel each other out.
There are several states in the world where they both can work simultaneously. But on days when the price action is not in line with a sticky inflation, higher rates, fed moderately tighter kind of direction, I think it's good to have this diversification, which is what we're seeing on our screens today. Yeah, absolutely.
And I do think that even though the three-month moving average is not as high as we had originally thought it was, you know, it's still 111K on the headline payrolls number. That's still a pretty decent improvement compared to where we were, which was in slightly negative territory at the turn of the year. So this is still an improvement.
And I would say that the 4-2 in the unemployment rate that we got, like if it's sustained, it does take us below the year-end FMC forecast, you know, which is basically currently stood at 4.3%. And that's an important marker that Bruce Kazman has been saying that we should be watching. I do think, I agree with you, it does foster the perception that this is a Goldilocks outcome in a way that kind of, you know, takes out July, keeps September in play, but, you know, growth is decent.
Fed is not in any urgency to act, so why not earn carry in the interim? So we will get to that. You know, I think that's where the EM High Yielders and Mike Harrison can talk us through that.
But that is certainly going to be, to me, the more relevant part of the discussion, you know, at least in the interim. And equally, I don't think that bullish dollar narrative is dead yet. So, you know, we might be on a bit of a mini hold here, but U.S. exceptionalism is still here.
So we're not, I don't think we can jettison that view just as yet. And on the carry side, we have, of course, been favoring the non-dollar funder carry theme rather, you know, which can work in either Fed outcome, whether they're holding or hiking. And what's interesting to me in the post-payrolls action is actually EM is doing what it's supposed to be doing.
You know, you're seeing a lot of the high yielders actually outperform today, but actually DM, at least in the initial aftermath of the payrolls number, we've seen the performance being led by Swiss and Yen. You know, it should really be led by the high yielders there as well, like Aussie, Nokia, Sterling as well. So to me, you know, those are the currencies that really should be poised to do much better.
But speaking of Yen, you know, we are obviously on intervention watch here, given the levels. It wouldn't be out of the question, isn't it, for them to get a softer number out of the U.S. and then, you know, potentially get some intervention activity right on the heels of that. What are you thinking about dollar Yen?
Exactly. I think the Yen has been the most active currency in a week where broadly before NFP, not at all has happened, if you're honest, except the Yen. I mean, it climbed about 162, looked like it could gain further before the NFP.
And investors are actually a little puzzled as to why, despite these apparently key levels and charts being broken, there was little evidence of any verbal job running out of the Japanese authorities. And I think Junya Tanase, our senior Yen strategist in Tokyo, had a good theory around this. His call was that the MOF was likely calibrating its stance, given that the April-May episode of intervention only had a limited short-term effect on the currency.
Second, there was likely some sensitivity within the MOF around the amount of intervention dollars that had already been expended. And third, there was this big data point, the non-farm payrolls release to navigate, and maybe that explained some of the silence. And today, earlier today, there was a writer's story that also shed some additional light on this issue, which is that there was, quote-unquote, a source's story saying that MOF interventions may no longer be telegraphed to the market in the same way that they had been before, presumably to imbue this tactic with an ambush-like quality in order to maximize bang for buck on intervention.
There was also a news article that hinted at some sort of cryptic coordinated intervention between the U.S., Japan and Korea, and I think the bar for that is extremely high, and Junya thinks so too as well. So we don't think that is realistic, but markets have been on the inside on a hair-trigger, as you rightly said, on intervention. And I think the focal point for FX, now that the post-payrolls price action seems to be settling a little bit, is to see whether over the rest of today's New York session you do get any action from the Japanese authorities to essentially hammer spot lower on the way down as they did after the weak CPI print in July of 2024.
And I think if they do do so, then it'll also open up the possibility of an encore tomorrow as well when the U.S. is out on an illiquid U.S. holiday-themed session. You might get even more bang for your buck if you were to intervene in that regard. So this is a bit of a TVD.
In the past, there have been a few occasions this year itself when it had seemed to me at least that the MOF had the markets on its knees almost, and they could have forced Dolly Yen a fair bit further lower than what they eventually ended up doing. So whether they adopt these sorts of more aggressive tactics around intervention, we really have to wait and watch. But at the end of the day, you do come back to the difference between tactics versus strategy.
So the intervention tactics could give you short-term downside on Dolly Yen. But at the end of the day, we've seen that every dose of intervention has had a smaller and smaller effect and a less doable effect on Dolly Yen. So I remain to be convinced that the fundamental story around the Yen in terms of the BOJ being behind the curve, etc., has changed in such a way that this episode of intervention will prove different from what we've experienced so far.
OK, thanks a lot, Anandam. So let's keep an eye out for that, and let's see what happens in the next 24 hours on the intervention side. Maybe we can round out this DM discussion and come to you, James.
You've had really a great out-of-consensus bullish sterling call. What's your latest thinking on sterling after the outperformance this week? And then what's the view on the other currencies that you want to highlight?
Yeah, sure. Thanks, Meera. So I think we heard what we needed to hear from Burnham on Monday, talking about discipline and the fiscal rules.
And obviously heading into that, there was some thinking that he would talk about flexibility in the fiscal rules, and that could be a danger for sterling. But I think the fact that he didn't, he sounded a lot calmer. I think he clearly seems to be being held back by the likes of O'Neill and the people that are advising him and around him.
And I think that then saw us break some key levels in euro sterling below that 86-20 level that we've been testing. And as you were saying, Meera, we've held that bullish view mainly versus the lower yielders. And with the politics calming down now, the question is how far can sterling go?
And if you look historically, in previous instances where the politics has calmed down, you think about after the budget last year, or after the budget in 2022, where obviously there was a more violent reaction, but then sterling rallied the following year. You've tended to trade as much as two pence cheap to fair value on euro sterling, which would take you down to an 84 handle in this case. So I don't think it's too much to say that euro sterling can keep trending lower here.
You also had a bit of an added kicker in that there's talks around a bit of a black hole in the defense investment plan for the budget in autumn, which puts the pressure on a little bit in terms of fiscal tightening again, so constrains Burnham a little bit. And we're not really going to hear much more, any details until you get close to the Labour Party conference or the budget. So I think there's kind of a bit of room here for euro sterling to the downside.
On the other currencies, we did get a pretty impressive number on the Norges Bank FX purchases this week for Noki, 524 million, caught the market a little bit off guard, but the reaction wasn't too big in Noki. I think the focus is really more on the oil price and the dollar. And actually, if you look at euro Noki here, we're much closer to fair value here now around 11.25 area.
And if you think the dollar's a little bit more two way here after the payrolls print, you know, wouldn't be surprised to see Noki gain a little bit of ground maybe next week as it has underperformed recently. So, you know, the kind of pairs we're looking at there are things like Noki stocky upside. Something to flag on stocky as well would be the better data that we've had recently so that the PMI was a bit better locally this week, and the tendency survey last week.
And I think, you know, from a client debate and positioning perspective, we have seen that people are a little bit on the fence in stocky and a little bit under positioned in shorts, I would say, as there is recognition that 2% growth in Sweden is pretty solid. But if we've shifted from a regime from growth to monetary policy, it's more about carrying the Riksbank and rate spreads. So that leaves a bit of an opportunity, I think, to build that short positioning in stocky, which we, you know, we think the market is a little bit, like I say, on the fence with.
So, pairs like sterling stocky, dollar stocky, I think, are still quite valid from an upside perspective. Yeah, I'll leave it there. Okay.
Thanks a lot, James. And then, Mike, coming to you, look, this is, you know, I think in terms of payrolls is probably like the best case outcome as far as your sector is concerned. What are you thinking about EMEA, EM going forward?
And in particular, I would say on half, you know, I've been getting quite a few questions on whether the dovish pivot by the central bank is enough to actually derail the bullish view on half. How should we be thinking about this currency that's actually very well subscribed to, I think, in the grand scheme of things. So over to you, Mike.
Yeah, for sure. Thanks, Meera. Yeah, I think you're right.
This is a pretty Goldilocks-y sort of number for EM. I mean, the client conversations that we've been having throughout our mid-year meetings have been centered around how many Fed hikes can EM and EMFX take. And you know, kind of, I think a view was forming amongst some clients that July was pretty live.
And if we got July, then we might see like a host of hikes getting priced, but it seems like, you know, the print today maybe has reduced some of those fears and kind of the EMFX has been performing pretty well and some of the higher does that for me, like you mentioned. I mean, when I think about the EM region a bit more specifically, I think the themes driving FX there are largely applicable to the EM kind of environment overall. For us, it's about carry as a theme.
And I know that's something that's been focused on the DM side of things as well. You know, within EM, LATAM is clearly the higher carry region, but there's also idiosyncratic political stories going on there that kind of might complicate the more classic kind of carry framework in some of those countries. But here in our region, we have central banks that are hiking, and they're hiking for the right sort of reasons, because growth is coming quite firmly, because they're looking to anchor inflation expectations.
So, you know, we've seen hikes from the likes of the Czech National Bank, the Saab. And so, you know, I think if we're in this broadly bullish environment for EM growth, which is what we have been arguing for our major outlook, then, you know, that does support the likes of reciprocal currencies, especially those that are hiking. And in EMEA, the debate is often, you know, which currency would you want to be short?
You could kind of make the case that a lot of our currencies are quite well subscribed to this theme. You know, but broadly, the Central Eastern Europe region, it does quite well from this kind of classic higher just do quite well as well. So, you know, I'd say overall, we're quite bullish going forward as well.
The lower oil prices certainly help as well. We have, you know, generally net oil imports in our region, particularly the likes of South Africa, one of the high beta growth sensitive currencies as well. We see as well as Hungary, like you mentioned, and Hungary, I think, falls a little bit into its own sort of special account, because it's not just a kind of beta and carry story.
It has its own structural drivers on the path to euro recession, which has been getting more and more appreciated by the market after the elections in mid-April. I think the factor that's making people a little bit cautious in our meetings has been that, you know, the NBH turned a bit more dovish. The market is pricing, you know, around 100 basis points of cuts.
And so I think the question arises, is this erosion of carry going to upend the trade and a trade that a lot of people are subscribed to either, you know, in option format, you know, some outright cash positions? I think the erosion of carry is never helpful for an EM currency overall. But the starting point is that half carry is still in the top third of global FX carry.
So you know, on a relative ranking, it still would be one of the higher carry currencies within EM and DM. I think if you add to that, that the story for me, I think, in Hungary is it's not really purely about carry anymore, right? This isn't like the days where the policy rate was 18% and you had exceptional carry.
Now it's more about the long term real appreciation scope and, you know, half real effective exchange rate has underperformed peers quite substantially since 2010. So there's quite a large kind of valuation gap that could be caught up without the currency becoming uncompetitive. And plus, at the same time, my final point in Hungary would be that it's sort of like a policy objective to have a stronger currency, you know, on the path to joining ERM and adopting the euro.
Hungary will need lower inflation, for example, and FX appreciation to that end is pretty helpful. So, you know, I think ultimately Hungary remains a bullish story, particularly for many investors out there. And while you may get knee jerk reactions and some near term half pain, I think rate cuts that get delivered versus what's priced shouldn't matter too much.
It may slow the pace of long term appreciation, but I don't think it will change the path. Yeah. I mean, it seems like, you know, the view in general, you know, it seems to be a more of a multi-year sort of convergent story, which I can still see as being that attractive.
From a top down perspective, it is looking like, you know, that there is some yield convergence for the dollar, but at least you still got some sort of yield advantage and you've got an idiosyncratic story that's strong. So, that's certainly a way better position to be in compared to some of these DM cyclical low yielders, which we continue to pretty much dislike despite the payroll support today. But let's stop there.
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