The desk interprets the potential for a U.S. government shutdown to weigh heavily on the dollar, particularly in the context of fading confidence in U.S. fiscal stability. Per the full note by J.P. Morgan, such circumstances may undermine the dollar's recent strength, especially as traders recalibrate expectations for interest rate derivatives in light of this political uncertainty. Additionally, upcoming political events in Japan could add volatility to the JPY, impacting broader dollar valuations against the currencies of the region. As flows from recently-released FX reserves hint at shifting dynamics, institutional traders are advised to watch for potential disruptions due to the unfolding U.S. fiscal landscape.
What the desk is arguing
The desk posits that the looming U.S. government shutdown could act as a significant destabilizer for the dollar, inducing broader market uncertainty. Per the full note by J.P. Morgan, the potential loss of confidence in U.S. fiscal management can lead to cautious sentiment among investors, which historically tempers demand for the dollar.
This aligns with observable market reactions where such uncertainties have previously resulted in heightened volatility. J.P. Morgan highlights that past instances of shutdowns often lead to increased risk premiums, suggesting traders might re-evaluate their positioning ahead of any formalized budgeting that would extend or end the shutdown.
Where it sits in our coverage
Our consensus target for USD/JPY currently stands at 1.075, with a range expected between 1.04 and 1.12. Notable firm targets include:
The desk's perspective aligns closely with jpmorgan, who anticipates a stronger dollar, while it contrasts with bofa, signaling a more cautious approach at the lower end of the target spectrum.
How other firms see it
Several aligned firms echo the desk's sentiments, anticipating pressures on the dollar, with jpmorgan reinforcing this view. Conversely, firms such as bofa remain skeptical, suggesting that even amidst the shutdown, underlying fundamentals could support the dollar.
Relevant currency pair movements such as USD/JPY and broader implications from the BoJ's monetary policy could further illuminate the evolving landscape surrounding the dollar's strength.
01The U.S. government shutdown is expected to negatively impact dollar confidence.
02Expect volatility in JPY ahead of Japan's LDP election next week.
03FX reserve flows from Q2 indicate shifting dynamics in dollar positioning.
04Traders should prepare for heightened volatility if the shutdown occurs.
Market implications
Traders should monitor the USD around 1.075 as a pivotal level, especially with upcoming shifts in fiscal policy potentially amplifying market reactions. Pay attention to USD/JPY movements post-LDP election, as these could set the tone for dollar resistance or support.
Risks to this view
A resolution to the government shutdown could bolster dollar strength unexpectedly, as it may restore confidence in U.S. fiscal stability. Furthermore, any significant policy shifts from the Bank of Japan could influence JPY dynamics, reversing the expected pressures on the dollar.
Hello, and welcome to this At Any Rate podcast. I'm your host, Arundam Sandilia, and I'm joined today by my colleague in New York, Patrick Locke. The U.S. government may have shut down, but reassuringly, your faithful FX strategy hands at JP Morgan are still very much open for business.
Now, I'd be lying if I said that this was a particularly exciting juncture in FX. Let's reserve that adjective for those lucky enough to traffic in the likes of gold and AI or Chinese equities and stuff like that. But I have to say, in speaking to clients, some of whom have turned outright bullish dollars in the last few weeks, we find ourselves on the relatively somewhat more sanguine end of the bearish dollar spectrum.
We're placing our faith, as we've said several times on this podcast, in this underlying pathology of central bank in the U.S. that is either unwilling or unable to respond in an orthodox fashion to elevated or sticky inflation. And all of this at a time when serial upside surprises on global growth on a broad basis are fostering a pro cyclical risk friendly climate that tends to be traditionally negative for the dollar. You could say that the breakneck rally that we've seen in gold and other precious metals in recent weeks is kind of symptomatic of this falling real yield slash debasement vibe around the dollar.
While this simultaneous trend that we've seen in the industrial metal complex, in cyclical stocks, especially those outside of the U.S. and especially in China, they're all sending this message of us being in the middle of a dollar smile. And that combination of debasement and middle of the dollar smile remains a reasonably potent one in our view. You know, there is no getting around the fact that there is a paucity of catalysts at this very juncture to trigger a fresh down move in the dollar.
That is the thorn in our side, the most commonly asked question from investors on the view. The shutdown has unfortunately robbed us of one, which would have been the non-farm payrolls later today. So our strategy is, you know, maintain a measured amount of dollar bearishness against the likes of the euro and Aussie, but also diversify that stance with, you know, convictedly held views on a bottom up basis across currencies such as the Canadian dollar, sterling, Scandinavian FX, etc.
We've discussed some of those views in this podcast in the past, but maybe we'll start this one with the shutdown. Pat, you're stateside, no non-farm payrolls today. I can't say that I'm entirely unhappy about that, given that that would have meant a later evening than normal for me.
But from where you are sat, how does one navigate the dollar through this data vacuum? Yeah, thanks, Vrindam. Look, I think, like I step back and I look at the government shutdown and I say, like, what really matters here?
And I think at the end of the day for the dollar, it's an asymmetric setup. I mean, on the one hand, like, yes, we've argued that, you know, the direct immediate pass throughs tend to be relatively minor. But there is very, there's effectively nothing that can be perceived as dollar positive in this environment.
Right. And so set against the more fundamental backdrop that we still, as you say, perceived to be dollar bearish, I do think it's kind of just conducive to running that kind of like dollar bearish view for the meantime. And as we've noted, there's still downside risks linked to it, you know, first, obviously, by the, you know, the risk of mass firings, like acknowledging, of course, that it's linked to groups that are funded out of discretionary spending and not mandatory.
So it's not like the entire government's at risk here. And obviously, it's just a partial component of the overall kind of like total payrolls here. But I don't think that's like particularly conducive to things, you know, to confidence and things like that.
And then there's still downside risks, too, in terms of like, you know, how elongated this thing ultimately gets, if it's a couple weeks, the direct impact on the lack of government spending should be modest and ultimately, you know, paid back anyway. But we've noted that the longer this goes, it risks becoming a little bit more exponential or kind of parabolic in the cumulative impact. So again, not a huge deal for the dollar this week, when you look at the price action, but still downside risk, and very little to kind of like, say, hey, there's actually some dollar positive channels here.
So I think all of that is kind of continuing, you know, on your point about payrolls, like, yeah, I tend to agree in kind of one of the other, I guess, maybe my more tactical read on all this is that, you know, we're probably at the most data dependent point of this year that we have been at any point. So necessarily, we're obviously highly geared to payrolls releases, given the Fed's kind of like asymmetry and things like that. So by not having payrolls, effectively, in my view, like a ball suppress it, right?
And outside of like, maybe some tactical de-risking of dollar shorts, just taking tips off the table, I still think like a kind of artificially suppressed volatility environment, even in just kind of like a one or two week window is still conducive to running like dollar shorts. And it's not altogether bad for carry, especially as you say, like other market that's continuing to perform well, too. And we noted last week as well, that kind of like, you know, the high yield EM space continues to be relatively impervious to backups and U.S. yields, at least more so compared to the G10 high beta block.
So I do think that doesn't really do any damage to those who think that, you know, this is a generally decent environment, you know, for like EM carry, that kind of thing. And then in the meantime, too, we're still getting some data that, you know, the Fed is going to have to keep a pulse on, probably a greater pulse than usual, just given the lack of the NFPs. And, you know, so far, it's been pretty weak.
There wasn't any kind of smoking gun out of jolts, but, you know, the labor market differential out of the Consumer Confidence Board data was weak, quite weak, you know, it was on kind of like a seven handle, I think, for the first time since 2021, single digit handle for the first time since 2021. And then obviously ADP was quite weak. There's a lot of kind of like, you know, caveats around that.
But my sense is that actually the trend of that data has been pretty decently aligned with NFPs. So that, I think, is a concern and our economists have been noting that basically, that might push Bowman and Waller back into the 50 basis point descent camp. Obviously it was a big deal that they withheld their descent at the last FOMC.
But, you know, if that's kind of like reintroduced at the next meeting, you know, that obviously has a, you know, a couple of different dovish layers that could be perceived as bearish, you know, for the dollar. So I still think like at the end of the day, like the current backdrop of the government shutdown, you know, is generally aligned with kind of like how we've been orienting the view around kind of like a less intense dollar weakness over the next couple of months. And then, as you say, just like as a final point, that's also happening against the backdrop of themes that are still continuing.
Growth outside the U.S. is generally doing okay. You know, PMIs this week weren't particularly impressive, but it does look like pockets of EM are kind of outlasting DM a little bit better. So there's kind of like a relative global growth component to still consider.
And then, you know, we note in our publication this week that, you know, empirical tests of FX sensitivity to fiscal concerns has ebbed somewhat from kind of late summer levels, which obviously makes sense given kind of what the curve has done. But nevertheless, that's obviously an enduring theme that's going to go on, you know, for a few months and probably more realistically into next year. So, you know, we continue to kind of see that as a differentiator from the FX perspective.
But I mean, anything I'm missing, what's kind of your take from Singapore? Yeah, I'm in a big seminar. I'd say that I'm getting some flashbacks of Trump 1.0 when we had a couple of these episodes.
And generally, if I recall the publications we've had at that time, you know, one sort of common thread running through both of those episodes was when Washington is in dysfunction, then the dollar tends to be especially weaker against the alternative reserve assets. So it's sort of interesting to me, this price action this week. So gold did, at least in the run up to the shutdown, what it was supposed to do, even though the price action was sort of muted after the shutdown became operational.
Bitcoin kept going up. Bitcoin did what it did on a couple of episodes in the last time we had the shutdowns. And then Swiss and Euro not quite playing to script.
But I think you could, if you squint, you could tell a story around dollar being inferior to that whole block. And so this debasement story is kind of live in my mind. We'll see how far this runs.
And then it's hard to kind of put too much meat on the bones of what these mass firings look like, because it's all sort of speculative at this juncture. But again, in my mind, if we cast our minds back to early 2025, you know, there were several things that we said at that time were risks, but in our heart of hearts, certainly in my heart, I didn't think that the administration would follow through, certainly not with the sort of solitude that they've done since. And hence, I'm unwilling to write off, having seen from 2.2 at work, that he is going to do what he said.
And as our economists have written, the numbers of the firings may not make a massive dent in the overall payroll statistics, given the size of the US labor force. But, you know, maybe what we might be somewhat appreciating at this juncture are the confidence effects of this kind of a mass federal workforce cull. Right.
So that's the other thing for me to watch. These are both well flagged, but I suspect that the dollar is not fully priced in the negative skew of risks around particularly the firing issue. Yeah, but, you know, even as the dollar story has gone a wee bit cold, it has to be said on the bottom up side of things, one of the brighter spots in recent weeks amongst our viewers has been your bearish turn on the Canadian dollar.
It's working out reasonably well. So tell us where that story is at currently. And if I'm not wrong, that is the Canadian payrolls report next week.
How important is that particular point of view? Yeah, that's right. So it's kind of, there's kind of three components right now in the CAD view, and we've called it a carry efficient dollar proxy with some local tickers.
Right. Kind of like dissecting those pillars. You know, I think the carry component is working.
The BOC cut, obviously, in September, they have a relatively low rate among the quote unquote, you know, higher beta block in G10 at the moment. There's risks, obviously, for more, I'll get to that in a second. You know, at the end of the day, they've delivered basically as much or more cuts than anybody else in G10, kind of like right in line with the RBNZ.
But I think, you know, the significant degree of cutting, I think, really is starting to become more of an obvious headwind, I think, for CAD. So I think that's still going. You know, the dollar proxy, I've made a point.
So obviously, like dollar CAD is generally low beta, right? But still, I think, you know, CAD trades above and beyond. It's kind of like respective local property sometimes just getting kind of like the dollar centricity of the market, kind of like that gravitational pull and perceptions of similarities in the market.
And one thing I like to flag is that obviously, we have a particular focus on the labor market data out of the US. If you overlay kind of like a three-month rolling average of the unemployment rate in Canada and the US, basically, the cycle, the trajectory is really quite stunningly close. And obviously, the US one is starting to move up a little bit more, obviously.
Canada is tracking that very similarly. It recently breached 7%, which is kind of like a problematic threshold, in my opinion. And obviously, like, so there's like a beta to the US in that sense, but obviously, with, you know, Canada's own kind of like local market weakness.
So I think in that case, it makes sense that kind of like, you know, CAD trades with a beta to the dollar, Canadian rates have the highest and most precise correlation to US rates, things like that. So the extent that we're still running in kind of like a bearish dollar overall kind of position of view, I still think that kind of makes sense. And, you know, one thing I do like, obviously, like the dollar has been a little bit stubborn of late, right?
We've had a couple of backups recently. We have some better data a couple of weeks ago. And so you get pockets of like short covering the dollar.
CAD has kind of insulated you when you're running these kind of like short CAD dollar proxies, because effectively, in these environments, dollar CAD has been moving up, right? We're back on kind of the 139 handle. So in a sense, you're kind of like insulated a little bit on the spot returns on the dollar backups.
But against that, you know, at the same time, you're obviously getting a lot of that carry efficiency that I was describing, given that, you know, the cost of running dollar shorts is meaningfully higher than the Canadian dollar. So effectively, both in kind of like a spot sense and total return sense, it gives you, you know, underweights in CAD give you a little bit more insulation to these backups. And so it makes it a lower beta and like overall setup.
But I still like kind of like that implicit property of giving you a little bit more of a buffer on something's backup. So that's one thing that I continue to like, and I think we've seen evidence of in the last few weeks. And then finally, yeah, like the local pickers, you know, Canadian data generally has been pretty weak overall so far this year, which, you know, makes sense.
We've been highlighting that, you know, PMIs for Canada have been in the gutter compared to the rest of the G10. And that obviously makes sense, just given, you know, it's huge, huge gearing to trade with the US. But as you say, payrolls is next week.
And maybe you could say it's even arguably a little bit more important without the US data. But really kind of like going into next week, we've had two consecutive months of contractions and headline Canadian payrolls. So that's not a great start, obviously.
Our economists flagged that the six-month run rate of payrolls growth in Canada is effectively in recessionary territory, if you look back historically. So it's on generally pretty weak footing right now. And going into the payrolls, I would say it's kind of like an asymmetric setup.
I think there's a bit of a mispricing in the rates market, I should say, in that basically the market's priced for about 24 basis points a cut through the remainder of this year, which would really only kind of take you to the lower end of the BOC's estimate of neutral, whereas JPM is calling for 50. And so if you get kind of like a third sequential, very weak labor market release in Canada, I think the rates market's going to have to pivot a little bit more obviously on that. And then you get kind of that local picker for CAD underweights above and beyond kind of like the carry in the dollar bearish proxy data that we're otherwise espousing.
So I do think it's meaningful in that respect. And if it comes in really hot, if it's basically like we've had two months of contraction, but this data can be kind of noisy and we get just some payback, then that's obviously going to take a little bit of steam out of it. But at the same time, the beta factors that carry, I still think, are reasonably good.
So yeah, I like the setup, I continue to like the setup. We'll continue to run that until maybe there's a little bit more obvious kind of like a dislocation in the dollar view, or yeah, Canadian data proves us wrong and that the downturn isn't going to be quite as bad as expected. But I've talked a lot.
So Arindam, I want to hear a little bit more about your views. We've got the important Japan LDP elections over the weekend. What do you think is kind of priced right now?
Is there a lot to play for here? Is there going to be kind of like a big ball event one way or the other? What's kind of your view of the landscape at the moment?
Yes, Pat, I'd say that a reasonable amount of the non-Takaichi outcome is now in the price. The dollar yen has come off over the past week or seven days from almost 150 to at one point sub 147. So the Takaichi risk, so to say, has been de-priced to a degree.
Betting markets are telling us exactly this. Even in all the opinion polls that have been run in the last couple of weeks or so, Koizumi slash Hayashi are outpacing Takaichi on most of them. So yes, so if she were to win, that would constitute a surprise.
Our Tokyo team thinks about a 1% move higher in dollar yen when we open on Monday. But assuming that we get our baseline outcome, given how far dollar yen still is from front end new differentials, I think we open a smidge lower from current levels, maybe somewhere closer to 146.50 or thereabouts. But then I think the bigger story that such an outcome opens up is what happened to the BOJ that plated for the end of the month.
You know, we speak to investors, I get and this is what I hear from our team in Tokyo as well. These international investors feel like an October hike is a done deal. That is indeed the APM call.
I don't know if it's entirely a done deal. There's a reason why markets are only priced for 50% or so of a hike. You hear Ueda's comments earlier today in Osaka and he gave absolutely nothing away.
He said that the government shutdown in the U.S. is an extreme problem because of the uncertainty that it creates. So our sense is that I think there is a runway for the yen to trade constructively, at least in the run up to the BOJ. The pattern of yen price action in the run up to BOJ has been the markets traditionally been constructing on a BOJ hike, constructing on the yen, and that outcome isn't always borne out.
So I'd say, you know, my head is telling me to trade the rumor in the run up to the BOJ and reassess maybe closer to the date. I think a favorable outcome over the weekend will open up pace to do that. So, Pat, last one for you before we wrap up.
We got second quarter COFR data this week. Any takeaways that our listeners should be mindful of? Yeah, I'd say the big news is that there's really no news on the dollar front, right?
I think the second quarter COFR data was the best opportunity to see if there is a real change in behavior by reserve managers surrounding dollar holdings. The reality was that there was not. Valuation adjusted changes were like minus 0.2 sigma, you know, compared to 10-year averages.
So nothing to obviously suggest that, like, reserve managers heavily offloaded USD or kind of like rotated around or anything like that. What I'd say, like, taking a step back is kind of consistent with the other kind of 2Q portfolio flow assessments that we've been making, just kind of noting that, you know, people are still buying U.S. equities in general for 2Q and the 3Q, so kind of that the dollar bearish risks from kind of like the flow perspective around the middle of the year seem to be kind of like, you know, fading or less intense than expected. So I think the COFR stuff kind of generally backs that up.
I think just other really quick in the COFR data, three things, the share of other currencies in terms of their allocation just continues like the linear rise that basically started, you know, five years ago around COVID, it's more than doubled over that period and basically has displaced more of the drop in the dollar share of allocations than any other currency listed, like euro, yen, sterling, CNY, et cetera. So that I think is quite striking and an obvious kind of like diversification signal. And then I'd say sterling on a valuation adjusted basis has been sold very strongly by reserve managers each of the last four quarters.
So that seems like a trend and potentially a material headwind to the sterling bulls. And I also note the Canadian dollar has also been sold by reserve managers in the first and second quarter this year, which is obviously conspicuous in terms of how that aligns with the timing around the trade war since the USMCA partners were really kind of the first feeder of that back in January. But we have a report on that for if any of you would like to see that in more detail.
All right, let's leave it there for this week. Thanks to our listeners for listening in. 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 3rd, 2025.