Global FX: Sailing the USD Bearish Ship in Murky Waters
The desk is advocating for a bearish outlook on the USD amidst a backdrop of geopolitical tensions and limited data visibility due to the US government shutdown. Per the full note source, the commentary highlights the fragility of global growth momentum and the potential for heightened credit risks, particularly in the context of US-China relations. This bearish sentiment is supported by recent trends in currency positioning and market reactions to the ongoing uncertainty. Our consensus target for the USD is set at 1.075, with a range reflecting diverging views among major firms.
What the desk is arguing
The desk maintains a structurally bearish USD view, arguing that the US government shutdown has created a data vacuum that delays any hawkish repricing of Fed expectations, while global growth momentum is showing signs of stabilization outside the US. They emphasize that new credit risk events and deteriorating US-China relations further undermine the dollar's safe-haven appeal.
Supporting this thesis, the strategists point to resilient growth indicators in Asia and Europe, which contrast with US domestic uncertainty. The IMF/World Bank meetings this week reinforced a consensus for a weaker dollar as non-US economies gain traction, with positioning data showing elevated short USD bets.
Implicitly, the desk is rejecting the notion that the shutdown will prove temporary and benign, or that US exceptionalism will reassert itself quickly. They see the data blackout as effectively delaying any policy pivot, leaving the dollar vulnerable to further near-term losses.
Key takeaways
- 01J.P. Morgan reiterates a bearish USD stance, citing limited data visibility from the US government shutdown as a key factor delaying Fed hawkishness.
- 02Global growth momentum outside the US is showing signs of stabilization, supporting non-USD currencies.
- 03New flare-ups in credit risk and US-China tensions are adding to the dollar's headwinds, with implications for AUD, NZD, and EM FX.
Market implications
The bearish USD outlook implies sustained strength in G10 currencies such as EUR, GBP, and JPY, as well as potential upside in AUD and NZD if global growth momentum continues. EM FX may benefit from a weaker dollar but faces headwinds from credit risk and geopolitical tensions. The lack of US data may increase volatility as markets rely on alternative indicators.
Risks to this view
Key risks include a rapid resolution of the US government shutdown that unleashes pent-up data, leading to a hawkish Fed repricing; a sharp deterioration in global growth that renews USD safe-haven demand; or an escalation in US-China tensions that forces de-risking. Additionally, positioning is already short USD, so a reversal could trigger a sharp squeeze.
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 our global crew. We've got Anand Sandilya, my co-head partner out of Singapore, Ben Jarman, who is head of Antipodean Rates, FX, and Economics Research, and then Patrick Locke, senior FX strategist from New York. So we've got a pretty broad-based spectrum across regions, and as usual, a lot to unpack.
Just to set the stage, I think we're going back to that period a few months ago when we were flitting from macro team to team, and we didn't really know what to hang our hat on. The only difference is we actually have no data to back that up because of the U.S. shutdown that continues. No payrolls means we don't really know which way the outlook on the Fed should go.
So three points I'll make here. The first one actually relates to the U.S. shutdown. Like I said, no payrolls.
We do get inflation next week, but that would still be, I think, a relatively incomplete picture. If you don't have the data and you're flying blind, we've made the point that the Fed and the U.S. side dynamics are going to be a pretty key driver of the dollar here, and in the absence of that, it's really hard to have a lot of near-term conviction. But what we do know is that the longer the shutdown continues, the more the headwinds accumulate against the dollar due to confidence, et cetera, but equally it'll keep investor conviction low as well.
Second, we maintained our dollar bearish outlook despite this near-term uncertainty, but one key thing that we have been watching is the growth signals outside the U.S. These are still pro-cyclical if you look at it across our suite of growth metrics, but what we've noted is that they have lost some intensity in the last couple of weeks. If you go down on a sectoral level, it does look like that's the DM-led thing.
Just to give you an example, none of our DM economic activity surprise indices are in positive territory right now, while EM is holding up better. We have a better percentage there, but I think the fact that we've sort of dipped into this negative territory for all of DM is a pretty meaningful development, and specifically for the eurozone, because if the ECs are negative for a long period of time, that can become a problem for the bullish narrative that we do have on euro dollars. So I think the next week, flash PMIs are going to be a pretty key development, particularly for the euro outlook.
And then the other thing I'll just flag on the growth side is that one thing we are seeing is a pickup in how EMEA and euro-block-linked high-beta currencies are ranking versus the North American ones like we had in Mexico. So it is telling you that perhaps some of the regional rotation is sort of coming back to the euro-block and EMEA, which was certainly the case earlier this year. And finally, we can't really have this discussion, I would say, without a brief touch on the main development this week, which was that U.S. regional banks did have a flare-up yesterday that led to a large move in equities, a large slowdown in the bank indices in the U.S.
And the situation is still fluid. Look, I mean, our base case here is that if you talk to our regional bank equity strategists, is that this is going to be a localized issue, not really systemic. But as I'm sure is always a concern, anything that relates to the banking sector does sort of raise the radar for macro investors.
So obviously, we should be vigilant to how that evolves. And I think it's also interesting that actually our APAC equity strategists are sort of citing the expectation also that there's going to be a high degree of investor sensitivity to credit risk in their region as well. So this is a space to watch and, you know, as we learn more about it in the coming days and weeks.
And I would say that, you know, it's better, you know, rather than sort of have a base case, base case is that, you know, for us is that this is not a global systemic event. I think it's worth thinking about how FX could unfold if conditions were to escalate. And I think the usual suspects are, you know, currencies like Swiss and yen outperform and the high beta, high yielders, currencies typically underperform in this sort of risks off kind of environment.
I think the most interesting takeaway should probably be for Eurodollar. You know, in client discussions, several have mentioned that Eurodollar should be weaker if you get a risk of episode, given its usual growth, you know, cyclicality. And I'd say I'd really disagree with that and counter it, but it really does depend on what's driving the event.
And if you have a US centric event or a wall shock like this, that would actually be positive for Eurodollar because there's more room for the Fed to be repriced. And for, you know, and a lot of those repatriation issues around US equities come back into play. So that would be the one thing that I'd be flagging that should be considered different in contrast to the usual playbook for risk events.
And that's a lot for me. Let's just focus on a few other parts, you know, around the globe. And Arundhath, maybe we can start with you.
You've had obviously a US-China re-escalation in the last week. How are you thinking about, you know, the local markets out in Asia and effects more broadly on these developments? I mean, I guess we've learned this week that escalating trade tensions is a whole lot easier than diffusing them.
And if I just look at the bland details of what has unfolded over the past week, you'd have to say that things have gotten worse rather than better. So US and China have both imposed tit-for-tat port fees on each other's shipping vessels. China has sanctioned the US subsidiary of a Korean shipbuilder.
President Trump is talking about tariffs on cooking oil and export controls on critical software to China. The US FCC is taking steps to ban a large Hong Kong telecom company from US networks over national security concerns. And the US Treasury and the USTR have exchanged barbs with China's Ministry of Commerce on this whole situation.
So this is all quite a stark contrast to the, I'd say, low-key, generally constructive mood music around US-China trade talks till about two weeks back. So if markets were looking for a quick resolution out of this, they'd have to wait. And risky assets in China as well as overseas have accordingly reacted negatively all week.
And of course, the inconvenience for Chinese stocks is that they went into this particular flare-up priced quite optimistically relative to the state of the domestic growth cycle, which continues to be mired in sogginess judging from this week's continued CPI deflation and softness in loan demand in the TSF data for September. So our sense is that markets are a little more vulnerable than they might have been had this happened last quarter, and this weakness may have more runway. But of course, weak asset prices need not necessarily translate one-for-one into weak effects.
We know that in the case of China, because the PBOC retains a high degree of control over the FX by its fixings. And these fixings have firmly pointed towards a moderately stronger CNY. We've gotten three consecutive sub-710 fixings on dollar CNY this week.
So CNY has been relatively well-behaved. But you'd have to say that the kind of conviction that we had on steady CNY appreciation through the end of the year is becoming murkier now, and we are turning tactically neutral on CNY from our previously somewhat constructive stance, even though we are keeping our end of year target around 710 and 705 three-quarters forward, more or less unchanged. For the rest of the region, I think there's really a decision to make here for FX.
Do you follow CNY and remain relatively well-supported, or do you follow the fate of Chinese stocks, given the general AI-slash-broad-risk dependence of many North Asian equity markets? Do you follow the broad-risk sentiment lower? As it is, the decision was not easy to make, because there are a lot of cross-currents in the region.
You have Q3 underperformance of Asian FX that makes it a little more insulated from general stress, generally positive seasonals into Q4. You have falling oil prices, which is generally OK for Asian FX. Then while US and China skirmishes flare up, you could envision the possibility of US stance on some of the other countries in the region, like Korea and India turning a little softer, and both of those currencies have accordingly reacted this week.
On the other hand, you have this bad neighborhood problem, and that's not an easy one to solve. Generally, broad Asian FX has followed Chinese stocks more closely over the last four or five days. You'd say that amidst these cross-currents, we are more or less neutral.
We have long seen some lower beta currencies versus bearish stances on some others. Broadly, I'd say not a ton of conviction on the broader Asian FX block. That echoes my comments earlier.
I guess speaking of bad neighborhoods, Ben, Australia, the Aussie dollar seems to struggle with the CNH anchoring problem as well, although because of the labor market data this week, I'm actually seeing that Aussie dollar is looking a bit cheap relative to what dollar CNH would imply or what some of our other models would imply. How are you seeing the outlook evolve there, and then anything new on New Zealand to add? Thanks, Meera.
Yeah, so the labor market data really was quite a curveball relative to the direction of travel we've had recently, where for a number of weeks and months now, most of the data have been sending a message of soft landing. Unemployment's been picking up, consumer doing better, housing looks like it's entering an upswing. And broadly speaking, the commentary from the RBA had been pretty hawkish, kind of reflecting that they think they're pretty close to neutral now, and there's some upside risk on their inflation forecast.
So against that backdrop, this is kind of pretty unemployment up two-tenths and three-tenths if you include the rounding. So given that we do have a backdrop of growth improving, and that the unemployment rate move has not been borne out in other measures of utilization, like business surveys, hours worked in particular were up quite firmly in the month, underemployment is still very low. It does seem like we should be fading this at least a little initially.
It can't be ignored in terms of the RBA reaction function near term though, and so if they're still saying they're somewhat restrictive, there is going to be a bit more pressure to move on face value. This number has kind of restored some of that symmetry between their mandate variables, so they now at least have a bit of an upside surprise on unemployment to offset the upside surprise that they've seen on core inflation lately. We think for November, it's a pretty tight call as to whether they go or not.
We have them on hold, CPI in a couple of weeks will be key in terms of how much it lands above their main forecast, but we still don't think, stepping back, that this is a story about a string of cuts, we still think that there's enough momentum to mean that this is like still late cycle tinkering, it's still going to be a shallow easing cycle overall, and that leaves Aussie still as a relatively high yielder heading into 26. For Kiwi, I think the interesting part of the backdrop here is that you have a market which is really quite bearish in terms of sentiment wise for what is a very late cycle point where they've already eased, the RBNZ has already eased a very significant amount and where you have large leadership changes at the RBNZ and also potentially large changes in prudential policy coming through into 2026. So in that context, it's interesting that the RBNZ took some steps to ease some of these prudential measures in housing.
We've been writing about this a bit lately, the fact that the easing cycle so far probably has failed to achieve the usual traction in particularly housing and consumption because of the tightness of mortgage restrictions that the RBNZ runs in terms of what banks are allowed to lend against in the housing market. So the fact that they've taken a step to ease some of that we think is important and shows the direction of travel into next year. It's not hard to imagine with sentiment as downbeat as it is and the front end of the Kiwi curve as flat as it is, that anything which makes the current level of interest rates more stimulatory is going to be important for rate pricing and also important for growth.
So those are going to be two important channels which we think maybe are being underplayed by the market at the moment as supports for Kiwi, the potential for rates to be repriced higher and also stronger growth from this easing of financial conditions. Yeah, I think it's quite an interesting sort of turn of events there and I do wonder if the relative positioning is setting us up for a bit of a reversal in both of those currencies compared to what we've seen all year. Patrick, maybe we can go to you now on the IMF, you've been in DC, any main high-level takeaways from those meetings?
Yeah, thanks Meera. It was a good series of meetings this week. Certainly nice to see clients again down there.
I've got four or five takeaways I think for the FX space particularly that I left with. Starting first with kind of like the investors and the market participants themselves, my sense is that the client base down there is still short dollars, probably almost certainly less than what they were the last time we met back in April. But nevertheless, it did still strike me that there is a dollar short position out there and maybe it's still fairly concentrated, which I thought was interesting.
Certainly I'd say that aligns with kind of our own positioning methods that have indicated maybe half to 60% of the broad, you know, peak dollar short has been unwound, but technically there is still kind of a stock of dollar underweight still out there. So I think that's generally consistent. To the panels themselves, kind of the first takeaway I got for FX is that the administration does seem pretty committed to ensuring, you know, the dollar's role as a reserve currency.
Now that's not the same thing as saying they want a strong dollar per se. But at the end of the day, I think they are cognizant of the importance of the dollar's role as a reserve currency and they've been kind of like acting in that regard, you know, with things like the stablecoin legislation operating kind of with the dollar as a reserve currency in the background with respect to these things. More tactically, one thing I did think was really interesting was that a couple of people expressed some surprise at how little attention the Trump administration has actually paid to FX.
You know, certainly I think there's an expectation that this could come back next year, perhaps as kind of all these moving parts, the tariff rates, they all start to settle. And perhaps if you don't see more of a correction or normalization in the trade deficit, then perhaps there's a little bit more of a focus on the dollar in that case from the Trump administration. Kind of related to that, there was some discussion about Euro C and Y and kind of implications for competitiveness from the Euro area region.
So I thought that was interesting, too. I'd say my sense is that a number of panelists kind of think there's some meaningful upside risk to U.S. growth from a number of different channels, obviously, AI and potential growth and productivity growth, a lot of uncertainty there. But I think some people seem to think, you know, quite optimistically there.
You know, fiscal, I think there's still quite a bit of optimism about what's going to be transmitted there. There was a lot of talk about deregulation, even though it was, I'd say, light on specifics, still pretty constructive on the growth impulse that way. I'd say I left with kind of a sense, really, that the impact of the fiscal support will be actually quite material in the first half next year.
And, you know, that should be a material insulation to any kind of like U.S. cyclical weakness or will kind of like, you know, amplify any firmness or resilience from U.S. next year. And then finally, I think there is, my sense was that there was a range of degrees of concern around Fed independence, you know, for next year. I think generally speaking, most people perceive the Lisa Cook situation to be negative.
But I think there's degrees of concern about how much you can read through to actual kind of like challenges to the insulation, kind of like buffering, you know, interest rate policy settings. And so it's not quite all one way, very kind of like bearish risk, I think, on this particular issue is my sense from the various analysts. Okay, thanks a lot, Patrick, for that.
And thank you, everybody, for dialing in. Please take a look at JPMorgan Markets for more details if you need them. This communication is provided for information purposes only.
Please refer to JPMorgan Research Reports related to its content for more information, including important disclosures. 2025 JPMorgan Chase & Company, all rights reserved. This episode was recorded on October 17, 2025.
Sources & References
How we cover this story