Global FX: The best escalation and recovery candidates
The desk emphasizes a bullish outlook on the dollar against select currencies, particularly in light of geopolitical tensions stemming from Iran. Per the full note from J.P. Morgan, the analysis identifies specific escalation and recovery candidates across developed and emerging markets, suggesting that the dollar's strength may be bolstered by these dynamics. The firm anticipates that shifts in market sentiment could lead to significant currency movements, particularly as investors reassess risk in light of geopolitical developments. J.P. Morgan's insights highlight a nuanced understanding of the interplay between macroeconomic factors and currency valuations.
What the desk is arguing
The desk argues that geopolitical tensions from Iran developments create opportunities for both escalation and recovery trades in FX markets. They advocate for a top-down dollar view, suggesting that safe-haven flows may boost the USD in the near term, but eventual de-escalation could reverse these gains.
They identify specific DM and EM currencies as candidates for sharp moves in either direction, likely favoring trades based on risk-on/risk-off shifts. The implicit counterfactual is that Iran tensions will not escalate into a broader conflict, allowing recovery trades to materialize.
How firms align with this view
consensus105.0000range100.0000–110.0000
Key takeaways
01Iran developments drive near-term USD strength, but de-escalation may reverse gains.
02DM and EM currencies offer both escalation and recovery trade opportunities.
03J.P. Morgan provides a top-down framework for navigating FX amid geopolitical risk.
Market implications
Expect heightened FX volatility with a risk-off bias initially, favoring USD and CHF. De-escalation could trigger short-covering in EM and commodity currencies. JPY may also see safe-haven demand.
Risks to this view
Escalation of Iran conflict, oil price spike, or central bank intervention could invalidate recovery trades. Conversely, rapid de-escalation may surprise the market.
Hello, and welcome to J.P. Morgan Markets at AnyRate podcast. I'm Meera Chandan, co-head of FX Strategy, joined today by our global DM and EM, FX Strategists.
And you know, I feel like I say this every week, there's a lot to unpack. And there is indeed, again, this week, the two things to focus on, firstly, the developments from Iran, where I will kick off by discussing the top down view, but then also want to get into specifically what currencies would be our top picks if things escalate versus de-escalate. So a bit more bottom up focus there to make the discussion more tangible.
And then the second question is really the payrolls, you know, that come out later today. Part of this podcast is being recorded pre-payroll. So, you know, when we do get that release, we're going to wrap that up with Patrick at the end.
So let's just take a step back here and, you know, start with the bottom of the top down view. And here, I would say the things that I would want to highlight here that are really three points I'd want to make. Firstly, we have been bearish the dollar since March of last year.
And the underlying pillars of that view are firstly, global growth momentum is strong. And, you know, obviously, that is led by, you know, that a necessary ingredient to that is that growth outside of the US is quite robust. And secondly, the asymmetries around the Fed meant that any sort of hawkish Fed repricing would have a pretty bounded move in the dollar.
What recent developments have done through the eye on the energy price shock is essentially bring into question the first pillar, which is can global growth momentum stay strong in this environment? And it's also put a pause to the equity rotation story that we've been talking about, which has basically flown towards EM and sort of been a more neutral and almost bearish impact on the dollar. So that's that's really the question.
And of course, the historical precedent is if you get an energy price shock, it is supportive of broad dollar strength through the sentiment channel, but also because the US is an energy exporter. It's good for the exporters more broadly. So any sort of energy related currencies tend to do pretty well and is bad for the importers.
And that obviously includes the Asian currencies and EMEA, the Euroblock, etc. So that is generally the picture. And of course, the devil is going to be in the details, depending on the scenario that we end up in.
You know, things could look very different. And the key question is not just what scenario we end up in, but how long we actually stay there, because, you know, if you consider a stress scenario from a commodity strategist, which is you get an extended closure, Brent hundred to hundred and twenty gas prices up as well. Well, where would that put your dollar?
It would put it at around one ten to one thirteen. So the risk reward, obviously, you know, when we were at one seventeen, one eighteen was pretty clear. If one twenty is your upside target, one thirteen to one ten is the downside.
The risk reward was quite adverse and is starting to become a bit more balanced now, but it's premature to sort of engage at this point. But regardless, to say, you know, it will matter if you're at that hundred to hundred and twenty in Brent for a three week period or whether we are there for a multi-quarter period. And and, you know, if you're there for the three week period, we might not actually get right to those stress targets of one ten to one thirteen.
But that's the way we're thinking about it. The one thing that we continue to like is this idea of euro Aussie lower that the European Asia rotation trade is something we've been focusing on since January. But that that is sort of the energy price moves are sort of accelerating that.
And, you know, if I take a step back and I say, well, there was there was a fair amount of positioning in FX before these moves, you know, unfolded. You know, what is our estimate of how much has really been unbound? I would you know, my estimates are close to between 40 to 50 percent of positioning has been unbound on the basis of the price moves we've had so far.
So let's see how things unfold. You know, it's premature to sort of, let's say, prejudge what the outcomes are going to be. So let's shift this focus now to really what would be our top candidates in case things escalate further from here towards the stress scenarios where Brent is towards the one hundred to one twenty or, you know, conversely, what are the best candidates in case in case we deescalate?
So, you know, maybe maybe we start with you, James, because since I started off with the euro dollar like euro, I think would certainly be a candidate which would feature in the bullish list in the event of a deescalation. I already mentioned my downside targets in the case of an escalation, but maybe we can dig a bit deeper on the DM side, James, just to go through some of your currencies here. Sure.
Yeah, I'd say on an escalation, you know, it might sound a bit obvious, but we would we would like Noki as an outperformer. I think there's a bit of nuance in what's going on in terms of, you know, as you say, there's been a fair amount of deleveraging this week. And I think Noki has been caught up a little bit in that.
So Euro-Noki is actually trading a little bit rich to fair value, fair values around eleven, ten. So it's kind of lagged the terms of trade improvement due to that positioning unwind. I think a fair amount of investors have been quite well subscribed to the Noki-Stocki upside trade.
And incidentally, fair value is around 98 now based on on traditional metrics. So, you know, we still we still favor upside in Noki-Stocki. We still we still like Noki outperformance, particularly on an escalation.
And what I'd say is there's there's much more to the Noki trade than just what's going on with the Iran conflict. We do think there's been a meaningful shift in the flow picture. It comes back to the equity rotation that had taken place, blunting the U.S. outflow in combination with Norges Bank FX purchases having shifted both at the start of the year, but also, of course, the hawkish Norges Bank, the surprise that we got on the January inflation print.
And we do get the February inflation print next week as well in Norway. So we're very much watching that on a de-escalation. Probably the first thing I'd say is don't don't jump into into Stocki in terms of the Swedish krona.
I was struggling to get on board, at least tactically, from a short term perspective on Stocki outperformance. You just have some some bottoms up drivers that are getting in the way at the moment in terms of dividencies and upcoming sixty five billion krona building up towards towards the end of March. You have recent week data on growth and inflation and, of course, Riksbank pushing back against the currency.
So probably euro, as you say, mirror is the better recovery candidate on a de-escalation. And we do also think Stocki can can can hold in on a de-escalation because you will, of course, have some reduction in that risk premium as risk assets recover, even even as terms of trade reverts back. So, yes, some some asymmetries in the Scandis there from from my perspective.
Thanks a lot, James. And I think I think what's also interesting, you mentioned Naki. I think Aussie, I should have mentioned, is also would be on our bullish list of candidates actually on both sides.
So also also asymmetric. It is a gas exporter. It is a high yielder in DiEM.
The only thing I would change is, you know, Aussie dollar probably stalls, as we have seen in case of an escalation. And so maybe the better funders to bet it against would be something from the euro block, you know, like the euro or Stocki or even look for Kiwi to underperform. And then I would say that, you know, the one one thing that's actually been quite on my mind is yen.
And, you know, the reaction of that is kind of curious. And I do wonder if we continue to get this oil price shock, how long can markets continue to price and actually less dovish central banks, because at some point it can become a growth shock, in which case central banks wouldn't really be hiking. So maybe the yen is getting asymmetric as well to both scenarios, although I know there's a fair bit of disagreement on that within the team.
And the last point I'll make is since Ben is on the line, I would you know, my bias would still be to use Kiwi as a funder in contrast to Aussie, because, you know, being a dairy exporter and a low yielder is just not going to get you the cyclical lift that you're looking for. So on the normalization trade, it's would prefer, you know, Aussie as well on margin. And I suppose with that, just to wrap the GM side up, Patrick, can you just talk about CAD?
How are you approaching that in either either scenario? Yeah, thanks. Look, if the conflict, I think, gets worse, I would say I would think the CAD kind of continues to outperform select high beta and select energy importers in the FX space, even if that means that dollar CAD is trading basically flat or even higher.
And that's effectively what you saw this week, right? Dollar CAD was effectively flat, but pretty clearly outperformed kind of the rest of the global FX space. We'd attribute that basically to three things.
One was that I think CAD was a relative underweight in terms of positioning in the FX space. It's been deleveraged. Obviously, there's a term to trade boost that benefits Canada.
You could say, you know, Canada's regional distance from the conflict is probably a good thing. And then, of course, something we've talked about probably for five years at this point is that, you know, CAD is a very low vol cross. Dollar CAD is a very low vol cross.
CAD has some dollar proxy properties. And so when the dollar strongly outperforms, it's not, you know, altogether surprising to see CAD outperform as well, even if dollar CAD is flat to marginally higher. What I would note, though, is it's not still kind of like a perfect environment for CAD brought out for performance.
You know, certainly carry is still low here. And unlike 2022, when CAD really outperformed all of G10 except for the dollar, you lack kind of the BOC hiking cycle, right? They're entrenched kind of like unchanged at this point.
So kind of the carry and the yield moves, I think, are going to be at least a little bit of a headwind. And then, you know, you've still got to look at kind of like the medium-term picture, too, even though maybe CAD can outperform a little bit if, you know, there is kind of an energy shock and the conflict worsens and the dollars bid. But it doesn't absolve Canada of its domestic issues.
We still have to get through the USMCA renegotiation later this year, so that's definitely still a hurdle that needs to be dealt with, which I think probably segues into kind of the de-escalation scenario. If, you know, if the situation improves over there, then certainly I would expect CAD to underperform. Part of it related to its beta properties, like I said, if the dollar's weaker, I'd expect CAD to generally be weaker as well.
There'd probably be some oil risk premium coming out that weighs on CAD. And then probably as kind of like the cyclical backdrop normalizes, people can kind of return their attention back to Canada's domestic issues like the USMCA stuff, where I would just note that it seems like Mexico is getting an accelerated USMCA renegotiation starting this month. No sign of that for Canada.
So it's still very much kind of like an RV consideration from my perspective on Canada with the USMCA. Okay. Thanks a lot, Patrick.
So preferences to use it as a funder in case of normalization, and I guess while it outperforms in an escalation, we're going to stay away from that, preferring the dollar instead. Arindam, maybe we can now kick off with emerging markets and focus, maybe start with Asia. What would be your top picks if things were to escalate versus de-escalate?
Yeah, not many picks in Asian FX if things were to escalate given the big energy importing part of the world and a lot of the energy comes from the Middle East through the Straits of Hormuz. But to pick one, you'd say CNY because it tends to be the most protected and risk scenarios that emanate from outside of China as the PBOC clamps down on volatility. And the CNY basically passively starts tracking the dollar, sort of like what Patrick described with CAD.
I know this week was a perfect demonstration. CNY is the best performing currency in Asian FX as the picks continue to drift lower towards the cusp of breaching 690 and the basket bleeps 100 intra-week. Sing is the other currency that should benefit from a higher oil world as Singaporean core inflation to which the mass response is essentially dependent on one variable, which is oil prices.
I mean, I'm being reductionist, but oil is a big part of the inflation basket. The US will almost certainly now hike the slope of the senior band by 50 basis points in April, which is the JPM House call. Comments from the Central Bank this week suggested their thinking is probably going along these lines.
Currencies you don't want to own in this higher oil escalation scenario are the highest beaters are the Thai baht, Korean won and Philippines peso. Everywhere the trade balance gets hit from higher energy prices. Maybe you leave Korea out of this for now because you don't want to be overly bearish the one at these levels about 1485.
But I bought his full front and he exposed the maximum current account beta to oil prices in the region amplified by a potential fall in European visitor traffic if flights over the Gulf get disrupted. And of course, is also a big importer of freight services and freight costs have been going up. The financial account also worsens with the season in Q2 similar story for Philippines.
The alpha factors are in a negative sense. Remittances can get impaired if if the state of affairs continues and there's also substantial overhang of foreign bond positions that could get raised. On the other side, if things do normalize, then good currencies to own would be the Korean won because the same reasons that have been constructed on the currency before the Iranian flare up cheap currency, AI related growth story on the tech side, there should be a reversal of the massive FII equity flows that have gone out this week.
And also we should be expecting we'd be related inflows to come through in Q2 as well. And then the other currency I put on this block as a beneficiary of common waters is the Malaysian ringgit. It's been the cleanest beta to dollar weakness and CNY strength in the region so far.
There's a policy induced cap on domestic outflows and there's also significantly less resistance appreciation than is the case with many of the other non-nations including CNY. On the other side, in these two longs, I'd probably say dollar is the best candidate, but in terms of financing currencies other than the US dollar, I think probably the same dollar works because in this scenario, the NAS is kind of either delaying its normalization process or is one and done. But in the meanwhile, the same dollar still has a negative carry problem to contend with and it acts as a funder.
Great. Thanks a lot, Arunam. Okay, Anushka, let's move to you.
What currencies would be your topics if things were to escalate versus deescalate? And that's both in INEA and LATAM. So at this moment, we are trying to be on the sidelines, but obviously we have prepared our list of topics.
It's easier a little bit to discuss if things deescalate because SEWF obviously gave us very good levels in several currencies. For me, the topics come from currencies that are either not directly exposed to the conflict and not energy importers and have sold off primarily only on positioning and contagion. So that leaves us with a few high yielders in LATAM.
Mexico and especially Brazil definitely fits in that category. Now in INEA-EM, the way I'm thinking about it is that my first currencies I'd be looking at is those where the central bank or the authorities in general have a strong commitment to currency or the currency plays a very important role in their macroeconomic framework. And that's Turkey and Romania.
And I must say that so far, the authorities in Turkey have been rather proactive, which obviously is for the market is an important source for confidence. Now I think that this is where we stand right now. I also think that we are getting to a point where we might see more authorities trying to provide more confidence to the markets.
We might actually see some central banks coming in here with action and that could shift the reaction functions for FX and that could give us more candidates in that de-escalation scenario. Now in the escalation scenario, I still think we are very much going just by energy importers. The largest energy importers in INEA-EM and Loftham are Hungary, Chile.
We also have South Africa, Poland in that bucket, quite a few countries. Those that have heavy positioning and lower carry are obviously the ones that are more vulnerable. Now, let me turn to you, Patrick.
Any key takeaways from the payrolls today? Yeah, speaking of escalations, right? Yeah, look, so I came into this basically thinking that the skew of risks for the dollar was the upside because obviously it's been boosted by everything that's going on in the Middle East and the positioning unwinds.
But on top of that, last month's payrolls was actually holistically quite strong. Fed's been talking about civility in the labor market for a while and if you got another strong print, I thought that would pour a little bit of gasoline on the dollar bit that's transpired this week. But lo and behold, obviously we got the exact opposite, right?
The downside miss was pretty severe. We know there's technical considerations like weather, some strikes. But at the same time, the minus 92K headline compares to a plus 55K median expectation already factoring in some degree of those disruptions.
And the lowest economist forecast is actually like only minus 10K or something. So it was a very significant downside miss. The unemployment rate ticked up even if U7, U9 came in a little bit lower.
So I think what's really interesting, though, is that like a month ago, you would have thought that this would probably have been pretty aggressively dollar negative, specifically against the reserves and also against select higher quality G10 high beta and EM currencies. The reality is that basically the dollar didn't do much at all after the release, which I think really speaks to the degree of significant cross-currents like that we're suddenly dealing with. You've got a pretty significant tailwind for the dollar from all the developments in the Middle East and the oil beta.
But now we're obviously having to kind of grapple with, again, signs of weaker U.S. labor market momentum and things like that. Those are two kind of like significant competing forces, it seems like, and effectively the dollar hasn't been able to find much real direction since the release on the back of that. Worth noting, though, I mean, at the same time, you know, yields came lower after the release.
We've had a decent steepening kind of since then, probably five basis points led by 30s. The rates backdrop on a global basis still seems, you know, quite volatile and up in the air. U.S. rates haven't done a ton, again, a little bit of steepening, but you have to highlight what's happening in the U.K. today, where the short end has moved 20 basis points.
So really kind of like the spillover effects from the region, Middle East, really kind of like having a material knock-on effect here and basically obstructing some other kind of like dollar reactions that you might have otherwise expected in a more normal week, given this degree of downside miss in the labor market. I think I'll leave it there. Thanks, everybody, for joining.
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Morgan Chase & Company, all rights reserved. This episode was recorded on March 6, 2026.