Global FX: RBA, JP elections, euro/APAC rotation, dovish BoE, US data
The desk anticipates a significant shift in FX dynamics driven by a hawkish pivot from the Reserve Bank of Australia (RBA) and a dovish surprise from the Bank of England (BoE). Per the full note from J.P. Morgan, the RBA's recent stance suggests a tightening cycle may be on the horizon, potentially strengthening the Australian dollar against its peers. Concurrently, the BoE's unexpected dovishness has raised questions about the future trajectory of GBP, which could lead to a rotation in euro/APAC currency pairs. As these developments unfold, traders should remain vigilant about positioning shifts in the wake of upcoming Japanese elections and US data releases that could further influence market sentiment.
What the desk is arguing
J.P. Morgan's FX team highlights a rotation from euro bloc to APAC currencies, driven by relative central bank policy divergence. They note the RBA's hawkish pivot as supportive for AUD, while the BoE's dovish surprise weighs on GBP. Upcoming Japanese elections introduce uncertainty for JPY, and strong US data adds to USD upside risks.
Where it sits in our coverage
We do not have internal coverage on EUR, JPY, AUD, GBP, or USD. Consensus and firm spread are unavailable.
How other firms see it
Without internal coverage, we cannot cite specific firmIds with stances.
Key takeaways
01Euro bloc to APAC rotation underway as policy divergence favors APAC currencies.
03Japanese elections and US data are key near-term drivers for JPY and USD.
Market implications
Expect continued EUR/APAC rotation with AUD and JPY gaining vs EUR. BoE dovishness may keep GBP under pressure. USD could strengthen if US data remains strong.
Risks to this view
Upside risk to EUR if ECB surprises hawkish. Japanese election outcomes could significantly impact JPY. RBA policy path may shift with data. US data miss could weaken USD.
Hello and welcome to J.P. Morgan's At Any Rate podcast. I'm Meera Chand and co-head of FX Strategy J.P.
Morgan, joined today by a variety of our FX Strategy colleagues from across the board, starting from Sydney all the way to New York. So let's get started. I suppose we've had some pretty volatile moves in markets this week, and while FX has sort of participated to some extent in some currency, we've certainly had decent moves.
But I'd say in the grand scheme of things, FX has been a bit of a sideshow in a way compared to what's going on in broader macro markets, if I look at something like what's going on in crypto with Bitcoin or even in equities, if you take a look at NASDAQ this week, and metals for that matter. So certainly an element of deleveraging here going through the system and some of the crowded positioning is getting washed out. As we said last week, I think that really hasn't really changed.
You know, our underlying signals on the fundamental macro side continue to be quite supportive of growth sensitive and cyclical currencies. It continues to be bearish to the dollar, however, you know, as we've seen, U.S. data has generally speaking, aside from the labor market data that we got yesterday, which was a touch on the softer side, has growth been surprising to the upside in the U.S. as well. So we could be up for a period of consolidation in light of the moves that we had in January and we're getting some of that.
But I think big picture, like, you know, aside from sort of risk managing a bit around that big picture, the view hasn't really changed. We're still in a highly pro cyclical environment. And that should be supportive of growth currencies in general, bearish dollar trajectories in general.
And we kind of got to stick with that view. One thing that I have been focused on is what's going on on the APAC side, in particular Aussie and Yen within the DM space. I think that's really been the area of focus.
And so are we going to kick off with that part of the discussion today? I've got Ben Jarman on. And Ben, maybe you can kick off with starting about, you know, starting to talk about the RBA and what this means for the Aussie dollar.
I mean, it was a pretty solid move and it was a pretty good call on the bullish view that we've had on Aussie. Is there more upside here? What are the main takeaways from the meeting?
And then obviously, what's going on with Kiwi as well? Thanks very much, Meera. So yeah, as you mentioned, there's been, I think, from the top down beta side of things, a few reasons to be constructive Aussie for quite a while now, as we're going through the back half of last year.
I think it was a case of fading downside risks and kind of taking out that Liberation Day related risk premium for Aussie. But then over the horizon, you could see chance of positive rate spreads to US starting to kick in. And that was for a long time, something which was priced in the forwards.
But I think we had an important moment this week when it actually was realised with an RBA hike, fairly convincing and hawkish rhetoric as well, in the sense that there's still a clear hiking bias. It was a unanimous decision. And so even though the case for the next hike is not completely locked in, we do expect another one in May.
I think the important point is that we've now crystallised, finally, positive policy spreads to US for the first time since 2018, so that's a big development of itself. There's been this kind of narrative based reasons to be positive Aussie for a while around relative growth, resilience and fiscal metrics, potential changes in hedging activity. But it all does look very different when you have the kind of the positive carry sort of dynamic starting to kick in.
And on our metrics, which we sort of previewed a little bit in this year's outlook, the cumulative move in rate spreads now from the very front of the curve through to about the sort of five to six year sector has been worth about four or five big figures on Aussie. So you can largely explain the move we've seen so far just on rate differentials alone. For a while we thought the rebound in Aussie would take us up to the high 60s.
We've overshot that for a little bit now. So we are raising our sights because you do have a genuine hiking cycle possibility here, which is not a story you can say elsewhere really in G10XX Japan. And that's significant.
We also, you know, recent volatility notwithstanding, do expect further gains in some of the commodity markets which are more material for Aussie on a beta basis. So particularly copper and gold. So that pushes our sights up towards, you know, the lower 70s in terms of mid-year kind of forecast horizon.
For Kiwi, the numbers we got this week really kind of interrupted the story a little bit in terms of it's just been such a consistent one way street of strong data and evidence of recovery on the activity side in terms of employment and labour force growth participation. We still got that, but, you know, adding to the supply side does mean that it's harder for the unemployment rate to come down. And so it did edge up a little bit.
That's probably going to make the repricing of Kiwi rates take a little bit of consolidation here. There's no reason for the RBNZ and particularly Anna Bredman's first meeting as governor to come out all guns blazing at the end of this month. But I think big picture we've thought of for Kiwi FX that it's really the combination of the rates repricing and the growth narrative that's going to drive things here.
And we're getting all the right signs on activity turning and that sort of bringing the supply side back, which is all kind of positive. So market reaction to the disappointment on unemployment this week was relatively muted, which I think is, again, a good sign. So we've raised those targets as well from high 50s to low 60s for Kiwi.
Thanks Anna. And it's been a really good call, I think, on the Aussie front. And I think the dollar CNY move lower is also helping.
So that to me is like a key ingredient here for this theme to continue. And certainly we're still looking for the Aussie outperformance on the high beta crosses versus likes of CAD in particular and Europe as well for that matter. That's like certainly something that's got legs to it.
But let's move the discussion to Japan now, because we're going into a pretty key event. And we've had both of you on for the last couple of weeks, so that's good. But February 8th, obviously, over the weekend, we're going to have the elections in Japan.
And obviously, Junya, you also highlighted last week that there was a GPIF report on asset allocation that was out to you today. Any main takeaways from that? And then what are you thinking in terms of scenarios for February 8th?
OK. Thanks, Rebecca. So let me start with the GPIF.
The GPIF released its quarterly report today. But in conclusion, there are no new information. Among the market participants, there has been the discussion about the possibility of GPIF increasing its allocation to domestic bond as a major to address to both yen depreciation and the rising JGBE, which the Japanese government is concerned.
In the past, when allocation changes in the GPIF were made, there were moves to adjust weight towards a new target before the official changes. And the attention was focused on whether such moves would be seen this time. However, as of the end of 2025, the domestic bond allocation was 25.29%, very close to the mid-rate of the domestic bond weight at 25%.
And slightly even lower than that weight at the end of September 2025. The next point of interest is annual review of the basic portfolio. Although the timing for annual review is not specified, it is reasonable to expect that if any changes are made, they will occur around the fiscal year end.
I mean that the end of March. Regarding the global house election in this weekend, in the report published in mid-January, we stated while the market initial reaction could differ significantly depending on the election result, our medium to long-term bearish view for the yen and our year-end target of the yen at 1.64 would remain unchanged, regardless of the election outcome. So this view essentially remains the same at this time.
However, in our previous report, we assumed as a central scenario that the ruling coalition would maintain a majority. But it now appears that the market consensus is shifting toward the landslide victory of the LDP. Under the current environment, an LDP single-party majority might not be enough to push the rent much higher.
And even larger victory, an absolute stable majority, 261 seats, may be necessary to drive the yen much higher. However, even in this case, the upside will be capped, as it has already been priced in to some extent, and intervention concerns have heightened. Therefore, it is unlikely that the yen will rise much above the level of BOJ rate check was conducted in January 23rd, low of the 159th.
On the other hand, if the ruling coalition lost its majority, it would clearly be a negative surprise for the Japanese stock market. And in this case, the resulting stock decline and the yen depreciation could be larger than the stock rise and the yen depreciation in the case of LDP single-party majority. In the event of a loss of majority, the yen could temporarily fall below 155, but this would not change our medium to the long-term bearish view for the yen.
In fact, in this scenario, the risk premium is likely to remain elevated due to increased political uncertainty. And there is also a possibility that the bias toward the fiscal expansion will be stronger than the LDP majority case. So, medium to long-term negative impact on the yen could actually be greater than that LDP majority case.
In other words, our mid to long-term dollar-yen target is not affected by the electron result, but the path to the target could differ depending on the outcome. That's from me. Thank you.
Thank you very much, Yunyan. I'm actually surprised at how quickly dollar-yen has retraced back to the 157 level. So, you know, we're obviously recording Friday morning, but I'm curious to see when the possibility of a rate check comes back in.
But stay tuned for that. Okay, let's turn to Europe now, James, starting with DMFX and mostly sterling. I think that's been probably the most interesting thing going on.
I've been giving you kudos on this podcast on your out-of-consensus constructive view on sterling so far. So, I'm going to give you a harder time today. Look, the BAE basically surprised everyone by being more dovish.
They basically poured cold water on the bulls. The politics are a mess. Is the honeymoon period over for sterling?
And are we going back to being the stagflationary candidate? And then, obviously, the other thing that stood out to me in your region is also the Riksbank. They pushed back on stocky strength.
The optimistic one on stock has been tracking pretty well so far. So, are we going to fade this pushback from the central bank or are we capitulating? Yes.
So, we do think this is a bit of a fade. I mean, obviously, Bank of England was a bit more dovish. This was a meeting, though, where there were dovish risks, you know, so we ended up with a 5-4 vote, though, which is a bit more dovish than we expected.
And with the forecast, we got downgrades across the board in the dovish direction. I would say, though, you know, in terms of if you look at pricing, we're only about one cut away from our economist terminal rate forecast. And it's going to be hard for them to go much below that because then you start bumping into neutral rate territory.
So I just kind of question how dovish we can get on the Bank of England in terms of the currency reaction, at least until we get some of the more disinflationary prints in April, which we won't actually get until May. I think that the more important thing is the improvement in activity, both domestically and globally, and kind of the return of sterlings, the return of being able to use sterling as a cyclical currency, which you couldn't do last year because of this obsession with fiscal risk premium. That's come a little bit back on the table this week after the escalation in some of the political risks.
I will say, though, it's a very different world when activity is improving because we've all heard about the doom loop, right, where you get fiscal tightening, worsens growth. That means you need more fiscal tightening. If activity starts improving, you break that doom loop, right?
It's a very different world to last year. And the blockbuster PMI prints we got, the fact that sterling is moving up the rankings on our quant metrics, driven by some of the growth metrics, I think it makes it harder for the market to price fiscal risk premium. I'll also say with the politics as well that there's been some complications for Raina today given a tax issue that's still being investigated.
She would have been the more kind of bearish candidate for sterling in terms of fiscal risk premium. Streeting is the safer pair of hands in the market's terms and in terms of fiscal risk premium. So, you know, I think that's partly why sterling is flooring back some of the losses today.
And we just think it's too early to trade this, you know, in terms of it's going to be more of a theme closer to the local elections in May. It's too early because the more activity potentially improves, the less of a doom loop there is. And there's less room to price the political risk on the back of that.
So one thing that we're watching quite closely is the high frequency labor market data. So some of the alternative data that you can get on the labor market now, because the thinking is if we are seeing this PMI rebound, economic rebound, could that actually slow some of the labor market weakness down? Let's see.
But it's something we're watching quite closely. If we get GDP data next week, again, that could calm some of the dovish fears. So we're very much fading this for sterling.
And I also think that if we do see a dollar sell off from here on this relative equity theme, I think cable will participate in that. And that can drag euro sterling lower as it did in kind of December. I think that dynamic is still in place.
So we're very much fading this here. For stocky, we did see obviously a pushback in the minutes from every board member mentioned the currency. It's a bit of a regime shift.
The central bank here in terms of they haven't really been fighting this move up until now. If you look back in history, there have been periods where Riksbank has based its entire policy almost on a weaker currency. You think back to the QE years of 2016, 2017, obviously that was a very different world in terms of ECB were conducting QE at the same time.
So we have to adjust for these different regimes. But ultimately, it doesn't change the overall bullish stocky view in terms of if you do have a more dovish central bank, that's helping growth further. It's helping the interest rate sensitive sectors recover further, which is ultimately what's driving the bullish stocky move in terms of the krona.
But you can think about this in relative value terms versus some of the other high yielding currencies where stocky might lag now, given you do have that pushback from the central bank versus the likes of Aussie where you don't have as much pushback from the RBA. But overall, you know, makes it potentially a bit more of a grind, but doesn't change the directional view for us in terms of still being bullish, the currency in Sweden. OK, thanks a lot, James.
Anushka, let's turn to you. Look, I mean, as a team, one thing that I've really liked is this idea that Euroblock can basically catch down to the APAC region in currency terms. Or maybe the other way to put this is really that APAC actually catches up to the Euroblock because last year was the Euroblock driven move.
And you know, what I'm seeing in the EM side and what you've been flagging on the EM, rightly so, is that you are starting to see inflation disappoint or rather be softer than expected in this region, which is causing some central banks to push back. In the EM, we've seen that with the Riksbank this week. And in general, we've been looking for Euro Aussie to head lower.
And we've done a bit more detailed work on that in our research this week. But in EM, are there any particular candidates in your region that you would like to flag which are facing this central bank pushback on currency strength and could be sort of convergence candidates? And then what's the view on EM effects overall from here?
So, on this theme, we've been noticing something similar, and that is that the valuations on some currencies in EM versus Asia, that relative valuation has gotten quite extreme, really large divergences there over the past several years. It is starting to actually, I think, impact on inflation. That's probably one of the drivers, well, for instance, in CE, we've seen quite a lot of downside surprises, especially in goods inflation.
For instance, CE stands out as the region with the largest real appreciation versus CNY over the past, let's say, five years. And I think it's starting to some extent play out. So, when we think about the candidates in this theme, some currencies can fit into it.
I would, for instance, highlight in CE, Zloty and Czech where we are a little bit more concerned about the interest rate differentials, which then links into the central bank responses to the downside inflation surprises. I would say at this moment, it's more something that we are watching. Ideally, I would like to see a lot more triggers in this direction for really that theme to play out, both in terms of on the CE side, central banks becoming more dovish or cautious on currency valuation more than they are now, and as well on Asia to see some shifts in the opposite direction.
Now, another interesting candidate in this theme could actually be Israel, where the central bank concern on FX is a little bit more palpable. We've also seen exporters complain more directly about the currency valuation. What is particularly interesting about Czech is that some of the valuations versus Asia FX comparative will yield the surplus economies with a gearing to the tech sector or gearing to the equity market.
Those valuations have historically actually been quite stable. And right now, we are in a moment where Czech is a lot more expensive than comparative Asia FX, especially valuations versus Taiwan or Korea have been historically very stable. Again, at this moment, something only on our radar, we are missing a bit more impulse or triggers into this theme, but certainly something we are watching.
Now, in terms of the broader EM theme, as you know, we've taken a step back from how much risk we are running based on our EMFX risk appetite index. That signal so far has not worked particularly well. Having said that, we've looked into the past signals which have not turned particularly successful and what they have in common is that actually at those moments, the EMFX risk appetite index rises to extreme, extreme positive levels, not just extreme, but very, very high.
And what we have noticed in that at those times, the index still predicts some relatively sharp correction, but gets the timing wrong on average by about three weeks. So we are still on the cautious side here. And what we are doing while we are cautious is focusing a bit more on idiosyncratic stories.
And I think some of the very high carry also has more protection. So that's where we are placing ourselves. We have some elections in EM, we have some very idiosyncratic FX stories to mention.
Fuel, Lira, Hungary, Brazil, these are the kind of currencies which might have full or beat us to the risk appetite at this moment. Thanks a lot for that, Anoushka. I'd say on the EMFX risk appetite index, you really can't be too hard on that signal.
I mean, it's worked nine out of the last 10 times. Stuff happens with models. And to be fair, we have had a lot of deleveraging in macro markets.
FX has been just relatively immune to that. So that's something there. And then, I mean, I guess on this regional rotation theme, I suppose the fact that even with the rate cuts, a lot of the EMEA candidates in your space are still relatively high yielding versus Asia, which makes perhaps DM a little bit more conducive to this rotation story early on in the cycle, which is why I think Euro and stocky kind of stand out, you know, early as lower yielding candidates, like 2% yield or lower in contrast to Aussie, where we are projecting yields to go just upwards of 4%.
So maybe that's the initial stage of the rotation that should unfold and we should be focused on. But Patrick, let's move to the US now. We don't have any payrolls this week, so we're back to square one.
But we did get other US data, which looked like it leaned negative, although I think we disagree on the extent of how negative that is. And of course, there's Walsh to talk about. Any thoughts there?
Yeah, thanks, Meera. So I think the whole suite of data this week, you know, in the US continues to show that dichotomy of like, you know, growth run rates being positive versus a labor market that's still relatively underwhelming. So on the positive side, I think, you know, the ISM release definitely surprised the upside.
You saw kind of like a coordinated rebound in yields, the dollar, I think equity did OK that day. So just like a kind of like a healthy relief bounce, I think, in that respect. We had four subsequent kind of like labor market data releases.
Like admittedly, as you kind of note, like there were a couple that had kind of distortions. So like claims that seasonal issues from the cold weather, the challenger layoffs for January might have been exaggerated in the headlines and things like that. But you know, neither were they especially strong either.
The jolts data, the drop in, you know, job openings to below 4 percent, which is basically a level below what 2019 averaged, you know, certainly doesn't basically send a very strong signal either. And, you know, like I I'm fully aware that there's not like an obvious surge in layoffs. It's still kind of that like cooling hiring demand.
But you know, the Fed's talked about labor market stabilization here. That has kind of led short end pricing over the next couple of meetings to basically have no very limited risk premium for easing. I'm just wondering, you know, if that kind of malaise continues or kind of a suite of softer labor market data this week points to a potentially softer payroll sprint, you know, next week.
And that's obviously that's going to matter. And the other way to put that, I guess, would be like, I think probably the labor market data this week for me gives you a little bit of kind of like an asymmetric skew for the dollar next week around payrolls, where I'd be I'd be surprised for a very strong payrolls print given this, you know, the recent data. And I'm a little bit more open minded about, you know, maybe a downside surprise here.
You know, in terms of market reaction this week, I do think, you know, that it was it was interesting from my perspective to see kind of the dollar rebound as, you know, maybe equities seem to take the data a little bit more negatively, seeing a little bit more of that traditional kind of like FX risk off reaction function. I think to your point, like certainly some of that was probably boosted by deleveraging. But interesting to see that kind of dichotomy there.
If the labor market does stay weak, then, you know, over time, I would expect that to ultimately continue to be dollar negative. And maybe that, you know, segues into the worst discussion. I think, you know, at the end of the day, I don't think Warsh's nomination really kind of like changes our strategic view for the broad dollar here.
Maybe that's surprising given the, you know, the amount of focus that the potential chair nomination has garnered over the last, call it six months. But I would make basically, I guess, like a few points. One is that I think we understand that Warsh, you know, is inclined to lower rates.
We see an interesting kink in the OIS markets for the June meeting specifically. But we continue to think that, you know, committee dynamics are going to, you know, limit the ability to deliver much easing. We actually have no cuts in our forecast for this year.
And the market's already kind of like reasonably discounted for this outcome. I think last I checked, 60 basis points were priced for easing this year. So I don't think Warsh presents like an especially dovish deviation from what the market had already kind of been trading and assuming.
So no real reason to think that any kind of like, you know, rates dislocation passes through to a big kind of like dollar shift. The second point we were making around the Fed share is that, you know, we hadn't really observed any obvious risk premium around this issue recently. And so given that we have his nomination, there's no reason to kind of like obviously de-price uncertainty risk premium in any sense here.
I think Fed independence is an issue that's not technically going to go away anytime soon, even though, yes, we've probably moved past kind of like the peak risk episodes around the Lisa Cook Supreme Court hearing. And then finally, on the balance sheet, certainly like a lot of focus around what the new chair is going to be doing there. It seems like it's going to be a heavy lift, though, for like obviously impacting the size of the balance sheet very materially.
And certainly, I think it's going to take time. Moreover, though, our rates colleagues have estimated the beta balance sheet changes through to rates. And they basically estimate that a 1 percent of GDP change in the balance sheet, which is about, call it $300 billion, is worth about 11 basis points in tens and maybe just a few basis points and kind of like the five 20s curve.
So that, I think, is, you know, it's going to take time to see the balance sheet change that much. And that's a relatively small amount of basis points in the context of like, you know, broader swings in rates markets and the concentration on the short end over the periods of months and in quarters. So I think altogether, you know, those three points to me suggest that we don't really have to change it kind of like the strategic dollar view that's predicated on the growth in the labor market dynamics here in the U.S.
And then, as you say, kind of the regional rotation and better global growth more broadly. OK, thanks, Patrick. I did have a follow-up question, but I think we'll wrap it up today because we're on time.
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