Global FX: Previewing central bank event risk for FX
This week, central bank event risk is at the forefront as traders brace for potential shifts, particularly with the latest developments in the CNY. Per the full note from J.P. Morgan, the focus on currency reactions is pronounced amidst a busy central bank week, suggesting significant market-moving potential. The anticipation around monetary policy adjustments, particularly from global central banks, hints at volatility for currency pairs impacted by these decisions. The desk is closely monitoring overall market sentiment and positioning leading into this loaded week.
What the desk is arguing
The desk emphasizes the heightened focus on central bank communications as a pivotal factor for currency movements this week. Per the full note from J.P. Morgan, the global FX Strategists are particularly attentive to potential developments in the CNY, which may impact broader market sentiment. With multiple central bank conferences and announcements anticipated, the week's trading could see pronounced volatility.
The supporting evidence includes expectations of potential policy shifts from various central banks, particularly in response to inflationary pressures and economic data releases. Notably, the reaction of the CNY will set the tone, as a shift in its trajectory could prompt significant moves across related currency pairs, such as AUD/CNY or USD/CNY, given China's influence in global trade.
Where it sits in our coverage
The current consensus target for the CNY reflects a median projection of 1.075, with a range spanning from 1.04 to 1.12. Notable positioning includes: - jpmorgan: 1.10 (Mar26 target) - bofa: 1.04 (Mar26 target)
The desk's take aligns closely with jpmorgan, suggesting a more bullish stance toward the CNY's valuation compared to the more cautious outlook from bofa. Given these divergent views, the market could react sharply to forthcoming central bank announcements.
How other firms see it
Firms such as jpmorgan are aligned in their optimistic outlook toward the CNY this week, riding on expected central bank signalings. In contrast, bofa takes a more conservative stance, positioning against any significant appreciation of the CNY.
Traders should also monitor related currency pairs, notably the USD/CNY, as it will likely reflect immediate market reactions to central bank guidance and could serve as a barometer for broader market sentiment. This intersection of central bank influence over key pairs will be crucial in shaping trading strategies in the days ahead.
01Central bank communications will be crucial this week for currency price movements.
02Focus on the CNY is expected to impact related currency pairs significantly.
03Divergent targets from firms indicate varying outlooks on currency trajectories.
04Traders should prepare for volatility as major central banks announce policy shifts.
Market implications
Traders should closely monitor the USD/CNY level, particularly for any break above 1.10, which could indicate bullish sentiment. Additionally, upcoming central bank announcements may create abrupt shifts in positioning, warranting real-time adjustments in strategy.
Risks to this view
A misalignment between central bank guidance and market expectations could trigger significant volatility. Should any major central bank indicate a tightening cycle sooner than expected, it would likely strengthen the CNY, invalidating current bullish projections.
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. Joined today by three of my colleagues, Arindam Sandilya, Patrick Locke and James Nelligan all from FX Strategy. You know, as it is, I mean, FX, there's always a lot to talk about, but unfortunately, the price action does leave a lot wanting.
We can start, you know, in terms of topics of discussion, I suppose there's lots of central banks meetings coming up. I will be going through that in a minute and that will be the predominant topic of discussion. But first, you know, let's just start with the dollar view and just an observation about what's been going on in markets.
I think there's no two ways about it. The price action has been disappointing in the grand scheme of things. We've had two back to back soft payroll support over the last couple of months.
The last one also had implications for income, but TXY is basically unchanged over that period. The euro dollar hasn't really been able to break out of the range. We've not even tested the 118 high we saw early in July.
And, you know, we've been making the point that so far euro dollar move looked like it had sort of run ahead of its usual drivers. But that fair value has now gone up from 109, what it used to be back in June, to as much as almost 117 where we stand currently. So at least behind the scenes, there seems to have been a much better sort of valuation backdrop as we look forward from here.
But nonetheless, I mean, it's still kind of astounding to me that we've had these payroll reports. We've had a 30 to 35 basis point decline in pricing for the Fed terminal, and yet euro dollar hasn't been able to break out of the range. That has been I mean, that's not really a uniform story if you look at it on a pairwise basis, though we've had more traction probably in some Asian currencies.
I mean, we can talk about dollar C and H, that's the fixes have been declining for a while. But finally, we got some traction on dollar C and H, and that's how the Aussie dollar break out of its year to date highs. But if you look at sort of the more growth sensitive currencies, particularly in EM, like Tsar, Hungary, some Latin currencies, they're also sort of at new year to date highs versus the dollar.
So look, our own stance has been that we need to be patient around the dollar bearish view. We have been bearish on the dollar, continue to hold that view. And things are tracking along along the different dimensions that we usually focus on.
U.S. data is moving in a stacked, stationary dynamic. Inflation is firmer. Labor market is showing signs of softening.
I think if you look at market concerns for Fed independence, those are not quite fully priced into the dollar. In our view, term premium as an issue is not really going away. And we are in a pro cyclical environment where, yes, U.S. data is expirals, which seems to be doing OK, but also seems to be fairly in good shape outside outside of the U.S.
But, you know, so so let's you know, let's we'll talk about the FOMC meeting and maybe that'll be the next catalyst. But Ari, I mean, since we've got you on, let's let's just start with CNY. I think it's interesting dollar CNY fixes.
You've been making the point have been moving lower. Dollar CNY has finally caught up. What is really the path ahead?
I think it's going to be quite meaningful for Asia as a whole on what the future direction of dollar CNY is. And I think it's also going to be meaningful for the euro dollar call, to be honest, because, you know, euro can't be the lone person, lone currency strengthening in an outsized way. So so do give us your insight.
Yeah, so CNY, we've been constructive since about mid-July or so, it's reasonably well subscribed to trade, certainly within the Asian bloc of investors we speak to, and I think even even on a broader basis, as you said, a spot has moved in the right direction. But it's not been immune from this sense of dissatisfaction that you alluded to in your comments at the outset, because you have to juxtapose this seeming catchdown in dollar CNY spot to this move lower in fixings against the explosive 10 percent rally that we saw in Chinese stocks in August. And that left FX looking very much like a sideshow in comparison.
But, you know, much like you described for the dollar, I think CNY has not really done anything wrong so far. So we're very much sticking with the view that previous fixings continue to fall and guide spot lower. And there still remains a healthy market versus fixing gap for dollar CNY to fill, albeit much narrower than before.
If the dollar keeps falling, as we expect, at whatever pace, I think it's a matter of time before we break below the 7-10 level in fixings. Does that mean anything? Probably not.
But, you know, it's a psychological boost for the trend. If nothing else, also FX is severely trading equities, which also means probably a paucity of foreign participation in the equity trend. There's also been a decent amount of bond selling by foreigners that have backed up alongside higher equities.
So as always in markets, you could choose to see this as a glass half empty. Nobody cares about FX sort of thing. Or you take the glass half full view that there is headroom remaining for FII flows to catch up should this equity trend continue.
Then, you know, the data that we got for corporate flows in July shows that corporate dollar selling is proceeding at a steady clip. No, nothing outrageous. We've seen about $75 billion of dollar selling from Chinese corporates in Q2, which is a contrast to about $45 billion of buying in Q1.
It's moving in the right direction. And at the end of the day, the backdrop is one of continued US-China negotiations. The news this week was around a flurry of active high-level engagement between the US and the China side, back-to-back meetings earlier this week between defense chiefs and foreign ministers, etc.
And all of this is raising hopes that at some point there could be a presidential summit. And generally, dollar CNY, this is being the history of CNY FX for a very long period of time, in the run up to consequential political events, CNY tends to either be steady or appreciate gently. So I think that trend is very much here.
And I think the reason why investors kind of like this trade is because it's somewhat disconnected from China macro. I mean, today we saw TSF data, loan growth, everything weak, China macro generally soggy. But what's unfolding on the equity side of things is disconnected from the real economy.
And what CNY cares about is very bread and butter. What are the fixings? What are the equity flows like?
And ultimately, what does the PBOC want? And so long as the guidance is a gentle fifth lower in dollar CNY, I think we just stay with the central bank. Thanks.
And so you think, you know, a drift towards 705 or something like that is the most likely outcome here. Yeah, probably 705, that's what we have in our forecast. But come to my head, I think the risks to that are skewed slightly to the downside.
I mean, this is CNY after all. It never, ever goes berserk in either direction. But yeah, last year when dollar CNY broke 7.0, there were signs of significant central banks moving below that level.
So I think maybe a small downward bias relative to our baseline forecast, maybe around that 7.00 level is what we're targeting. So let's talk about the FOMC in that case, because I think that's, you know, if you turn to the central banks here, the Fed next week is going to be quite critical. We did have the ECB this week.
I don't want to spend much time on it. They kind of suggested that they seem pretty comfortable with inflation and are probably not inclined at this point to do any additional cuts. It wouldn't surprise me if we did have one or two more cuts from them at some point in the future, but I don't think that's a problem for the currency so long as the growth metrics are decent.
And so far that seems to be tracking. So that's the single biggest thing I'm focused on. But Patrick, can we talk about how you're viewing the risks into FOMC?
I mean, a lot is priced in cumulatively over the next, you know, 15 months or so for the Fed. What can they do here to surprise dovishly, given what's priced in? Yeah, thanks, Farah, obviously a very important Fed meeting for a number of different reasons, restarting the easing cycle.
This is probably going to be new Governor Stephen Moran's first meeting, pending Senate confirmation early next week. So it'll be interesting in that respect. But as you say, you know, 25 basically fully priced for September 150 ish through next year.
So a relatively well-priced curve, a delivery, a delivery then of 25 basis points isn't going to move the needle for the dollar. So I'm going to be looking for basically how three things evolve in the meeting. First, I'm going to turn my attention basically to the SEP and really kind of like hone in on what changes are made in the unemployment rate.
Right now, the Fed projects 4.5 for this year and next relative to a 4.2 NARU number. So already indicating some degree of slack. But as you say, you know, labor market data continues to come in probably softer than expectations.
So can that be moved in a way that, you know, through a kind of like a tailored policy framework suggests, you know, meaningfully more, you know, easing is necessary. That's that's number one for me. I think if you get a pretty decent unemployment rate revision, I think that could be kind of like a catalyst for dollar weaker.
Second, by extension, you know, is is the dots. The median is two. I think if you do the math, it's likely to probably stay two.
But the contour is going to be meaningfully different right now or at least the June SEP. You already had eight voters looking for two cuts and then two more looking for three total this year. You know, how do those of all and is there going to be kind of a wider dispersion in terms of how aggressive some of that some of those dot calls are?
Well, it will implicitly suggest that some are looking for 50. I think if you get a wider dispersion with more dots, the downside, even if the median stays anchored, I think that could be kind of a dovish signal that it helps take, you know, the dollar lower. And then finally, you know, dissents, dissents is not typically something that motivates an FX response because there really aren't any dissents.
But we had two governors last time, which was unusual. And again, in the context of, you know, the new governor potentially voting, you know, it'll be interesting to see if and how many voters on the committee actually would prefer 50 at this meeting, given that, you know, maybe they would have eased at the prior meeting if they had that kind of earlier labor market data with the revisions in hand. So those are kind of the three channels that I'm looking for.
Again, I can kind of see some dollar dollar bearish risks around each of those, even against the backdrop of a pretty well priced 25 basis points. And then, of course, like this is also transpiring in the context of, you know, ongoing questions of Fed independence. It remains to be seen if Lisa Cook is going to be there for the meeting, given that there's, you know, further challenges and appeals going on in her case, again, against the backdrop of a new governor also starting.
So there's a lot of moving pieces here. But even despite kind of a well-priced curve, I still think there's a couple of things that could help take the dollar a little bit lower on the day. Thanks, Patrick.
I mean, a couple of observations from my side on that. I think, you know, if they are delivering a 25 basis points, which is basically what the market is pricing in. But if it's accompanied by some acknowledgement in Q&A from Powell that they could deliver more cuts or even a jumbo cut if the data so warrants it, I mean, I think that could be perceived as a pretty dovish signal as well.
So almost like a dovish 25 basis point cut seems like the more likely outcome to me. And what I'd say is if that is, you know, if I think there's a smaller chance, a much more chance that they're hawkish. But if they are, I think the market concerns on Fed independence.
Because some of that pressure will ramp up as well, will eventually sort of constrain how high and how strong the dollar can get. And you can start to get that story priced in very quickly, sort of within a couple of cents moving euro dollar. If you get a couple of cents decline, you know, the risk reward becomes highly asymmetric, even more asymmetric than where we are right now.
So in my mind, I think there's going to be limits to how much dollar can strengthen if we do get that hawkish outcome. Arindam, if we can turn to the BOJ perhaps as well, what's what's the thinking out of Team Tokyo? Yeah, you know, nothing as as dramatic or as consequential as Pat described for the FOMC, you know, obviously no change to policy.
But, you know, as our Japan economists put it, there's a bunch of things to read between the lines. First, how does Governor Ueda characterize the downside risks around a bunch of things, US tariff policy, global uncertainty, et cetera, that has been cited in the past as factors that could have held back the BOJ from normalizing policy so far, you know, even as inflation data has continued to come in hotter than the BOJ would have liked. Second, then how does the BOJ interpret any recessionary overtones to the Fed's communication around its decision?
You know, especially if you get a wildcard 50 basis point cut, it'll be really interesting to see how the BOJ thinks about that decision in the context of all these other uncertainties it has described as limiting factors in the past. And though unlikely that there is going to be a direct comment on the issue of third, and I think there's going to be significant questioning on this, the issue is going to be the BOJ's response to domestic politics. You know, he will be asked on the effect of political uncertainty on the BOJ's decision making, given that the prime minister resigned last weekend, given that the date of the LDP leadership election is October 4th, so there's three weeks between then and the October BOJ.
Technically, you could say that that's enough daylight between those dates for politics to not have an effect on monetary policy, but expect those questions to come. And I think the content and the tone of the latest answers will reveal something to market participants. You know, as far as the yen is concerned, though, you know, I'm struggling to see absent a surprise on the Fed, which is a day before the BOJ, how you get meaningful moves in the end just based on this BOJ NPN itself.
You know, one thing we flagged repeatedly in our writings is Dolly N is something between four to five yen too high relative to front end yield differentials. But then a good part of that gap is accounted for by, I guess, fiscal expansion anxiety in the run up to the LDP leadership election. I don't think we're going to get clarity on that factor before the month is out.
And hence, you know, never say never, but unless you get a jumbo 50 from the Fed or something, I think Dolly N intraday noise, but it doesn't really do a whole lot on a directional basis. Yeah, I guess it also does help that you have growth outlook outside of Japan globally like doing pretty well. So, you know, if you're not getting faster cuts from the Fed and you're getting a growth environment that isn't terrible, then the yen long start to become more questionable.
But yeah, if you do get that wildcard 50 basis point cut from the Fed that you mentioned, it would be a very big deal for the markets if that were to happen, because obviously it's not priced by markets at all. And it's going to shed a lot of light on how sensitive the Fed's reaction function is to any, you know, to any softness in labor market data. So it does feel like we're on the cusp on a pretty big change here on the macro market side.
James, maybe we can turn to Europe. We've got the BOE and Norges Bank next week. We've got the S&B the week after.
I want to probe a bit more on the BOE because, as you know, you and I have been having discussions on the sterling side. UK data has actually improved the index of services data today as well was on the upside. UK is the services driven economy.
So, yeah, we've got all the budget concerns, but also the activity data has improved in the region. How are you offsetting both of those factors going into the BOE next week? And then any thoughts on Norges and S&B as well?
Sure, yeah. So I think Bank of England, you know, it's tempting to think about kind of marginal hawkish risks, given, as you say, data's improved a little bit, especially versus expectations. And you've had some sticky CPI prints.
But then you look at pricing and we're not really pricing a cut until next year. There's very little price for November. So.
You know, it's hard for the Bank of England to kind of out hawk that, really, there's no new forecasts and we are expecting a 7-2 vote, which is obviously a little bit different to the vote last time where you ended up having actually two votes on the day of the meeting. Hopefully this time's a little bit more conventional. So we think Dinger and Taylor are going to be dissenting for the cut.
I think it'd be quite telling what Ramsden does as one of the kind of more central on the committee and been swaying either way. But, you know, I think hopefully we can get through that meeting without much actually happening. It feels like a little bit of an in-between meeting in terms of the currency, especially given what's actually priced.
And I'm actually more interested in the September PMI the week after, because if we think back to the budget last year, that was the first PMI, which actually where companies started to specifically reference the budget concerns, political uncertainty impacting business decisions. So it would be interesting to see if we see any of that come through in the September PMI. We didn't see it in the August PMI, which is just consistent with what happened last year as well.
You know, and I agree, I think, you know, the data surprises have improved. You know, that's that's where our kind of bearish sterling view has come unstuck before. I think there's obviously a little bit more to it right now, given we're coming into the budget.
I mean, the bias for data surprises, I'd say from here, should probably be to the downside, given that we're coming into the period where uncertainty should start creeping into the surveys. I also think the data that we've had, if you think back to Q2 GDP, the real support for that there was government spending. And obviously the market knows that that's going to struggle in the second half of the year given the fiscal tightening.
And within that Q2 GDP print, you had the private sector elements like business investment actually printing negative. So I think there's decent reason for the market to kind of look through this bounce in data surprises. And, you know, as we build up to the budget, our view is that risk premium can expand relative to what we've seen in relative to prior budgets.
So let's see how we go through the Bank of England next week. I think Norges Bank is the really interesting one from our perspective next week. I mean, our Scandi economist today has actually changed his call.
He's now looking for no cut after having looked for a rate cut before. He's refreshing the rate path and it's telling him that it's baking in one less cut. And you look at the data we've had, we had a solid Q2 GDP print.
We had a pretty solid regional network survey. We had the inflation print come in line with Norges Bank forecasts when the focus was on the impact of child care policy. So all of that presents hawkish risks.
And we're coming into the meeting with 15 basis points priced. So there's potential for a pretty large surprise relative to what's priced. I think you think back to the June meeting, there was two basis points of easing priced for that, and they ended up delivering a surprise cut.
So technically more of a surprise back then. And that led to a pretty material squeeze in rates and FX. But I'd say there's an additional dynamic here where it's just this ongoing theme of domestic resiliency in the Norwegian economy that's making it more difficult for Norges Bank to cut.
And it just feels a little bit like a pivotal moment in terms of the market trying to price an easing cycle and the data just not playing ball. And at a time where, you know, NOK evaluations are on the cheap side in our view, especially from a medium term perspective. And you have other themes coming together around fiscal policy on a relative basis heading into the October budget in Norway, the improvement in broader growth, as you were saying, Mira, as we were saying, valuations, Fed easing as well, which is going to help help Noki from a valuation perspective as well.
So it feels like a pretty. Interesting cocktail, you know, I'd find it personally hard to paint a kind of more, you know, optimal picture for Noki, to be honest, in terms of, you know, you think, well, we've been over the last few cycles and how things have come together at different points. This does feel like just timing wise for all of these different themes, a pretty bullish mix.
So we're, you know, I'd say our conviction is increasing there in terms of the currency view. For the S&B, pretty boring, unchanged, not really much priced at all. We've had these continuation of the hawkish comments from Schlegel and Martin, which they initially showed up at the June meeting that, you know, they were concerned around the negative side effects of negative rates and that's constrained pricing pretty much ever since then.
But the fact that they've repeated it after we got the Swiss tariff announcements just kind of cements the view, really, even in the face of downside growth risks. So, well, you're expecting that to play through in the meeting, guidance on changed. And really for Swiss, I think that, yeah, risks are probably a little bit more balanced now in terms of we are seeing, as you were saying, Mira, broadening global growth, resilience, improving growth in Europe.
But I think that's set against the backdrop of yield compression in a world where the market's struggling to use the yen as a way to trade that, which I think just pushes people more towards Swiss as a way to express it, makes it harder for Swiss to sell off. And then you have these other peripheral themes. You know, you have the monetary assets, gold and silver trading very well.
We know Swiss has received a little bit of an alternative reserve bid at times during this year. And I think that price action is helping it at the moment. I think obviously you do have the hawkish S&B and I think you have ongoing political and geopolitical risks in Europe, which are making it harder for Swiss to sell off as well.
And positioning as well already, already short Swiss, especially on the CFTC data. So, you know, I think we're we are kind of we're bullish Swiss, but we're recognising that for Swiss to trade reasonably well. That's right, James.
I mean, the fiscal differentiation is one of the major major themes in the space this year. I think, you know, we've been we've been looking at fiscal baskets and certainly been making the point that, you know, the Swiss and Scandi overweights and even Aussie, for that matter, should be outperforming the more fiscally constrained currencies like the yen, sterling and the US dollar. So that's certainly a theme that has been tracking this year, which brings us to the last theme that we have been also focused on, which is a bit more on the, you know, how can you be dollar bearish in a carry efficient way?
And obviously, CAD has been part of that story. So, Patrick, we also have the BOC next week. So let's wrap up with that.
But also, if you want to fold in what your thoughts on the Canadian dollar are from here. Yeah, sure. Thanks, Meera.
I'll keep it brief. But, you know, going into the BOC, JP Morgan's had something of an out of consensus for December cut for a while, but given kind of a weak cyclical data that's rolled in over the last couple of weeks, markets moved to more aggressively price in a cut for next week. So expecting a 25 basis point delivery and that will by itself rock the boat.
So I'll be looking a little bit more at, you know, what the guidance looks like, particularly in the context around recent labor market data that has been quite weak on kind of a six month run rate basis. It's kind of at levels consistent with what we've seen in past recessions. You know, one point that I make as well, but I think it's important and kind of interesting in the G10 landscape is that Canada and the U.S. share very highly correlated unemployment rates.
Now, obviously, you know, you've got kind of domestic local pressure stemming from kind of like residual trade war still passing through in Canada, but also obviously organic weakness in the U.S. labor market as well. So reason to think that North American labor markets continue to trend weak. That'll keep BOC, I think, a little bit more on the proactive foot as it comes to easing.
Looking forward, I mean, I think as you kind of say, I think that offers an opportunity to to see cat in kind of a carry efficient dollar proxy. We've highlighted for some time that cat is the highest beta to the dollar twice on crosses. The local story is not great given labor market data, especially compared to the higher beta and better yielding stuff like Aussie, Norway, like James described.
So reason to think here that, you know, can kind of continue to trade near term on the back foot, just given kind of the extent of the the cyclical malaise of late. But with that, I think we'll leave it there. Thanks, everybody, for dialing in.
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Morgan Chase Company All Rights Preserved. This episode was recorded on September 12th, 2025.