Global FX: The weak dollar view passes a flow test
The desk asserts that current conditions favor a weakened dollar, corroborated by the dynamics of growth and inflation in the U.S. and supported by positive cross-border USD flows despite recent tactical developments in G10 currencies. Per the full note from J.P. Morgan, the current climate presents challenges for the dollar bolstered by persistent inflationary pressures alongside a dovish turn from the Reserve Bank of New Zealand (RBNZ), which has implications for global risk sentiment. Given that institutional flows are generally favoring assets denominated in currencies that have been more resilient recently, this trend could further drive the dollar's decline. The consensus target among major players suggests continued weakness for the dollar, but the path remains sensitive to upcoming geopolitical shifts and central bank decisions.
What the desk is arguing
The desk frames this as a scenario favoring a weak dollar, influenced by the growth/inflation narrative in the U.S. Per the full note, the current economic landscape highlights inflation pressures that challenge dollar strength, further complicated by dovish stances from key global central banks.
As it stands, U.S. inflation data continues to rise, which complicates Federal Reserve policy expectations while cross-border USD flows remain robust, signaling persistent demand. The dovish surprise from the RBNZ has shifted market sentiments, suggesting central banks are now leaning towards more accommodative policies in the face of economic uncertainties, contributing to downward pressure on the dollar.
Where it sits in our coverage
J.P. Morgan sets a target for the dollar at 1.10 against the euro for March 2026, aligning with their broader strategy amidst these developments. Other firms have varied targets, with some more bearish.
This view from the desk aligns with the spread from 1.04 to 1.10, suggesting that they are sitting at the upper end of expectations for dollar weakness against the euro.
How other firms see it
Firms aligned with this weak dollar perspective include jpmorgan, while bofa represents a more cautious view regarding dollar depreciation. The consensus is notably divided, with some analysts projecting much stronger dollar resilience, particularly in light of potential policy adjustments by the Federal Reserve.
Related observations regarding USD/JPY should be closely monitored as it could reflect sentiments around Federal Reserve monetary policy and the broader geopolitical environment, which would likely drive volatility in the near term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Weak dollar thesis reinforced by U.S. growth/inflation dynamics.
- 02Dovish RBNZ adds uncertainty to global risk appetite.
- 03Cross-border USD flows remain strong, supporting alternative currencies.
- 04Market sentiment sensitive to further central bank actions.
Market implications
Watch the USD/EUR level around 1.10 as a critical resistance point; any sustained break below could open up the path for further dollar weakness. Additionally, observe geopolitical developments or sentiment changes leading up to the upcoming Fed meetings, as these could significantly impact dollar positioning.
Risks to this view
Should inflation data from the U.S. show signs of unexpected moderation or if major central banks announce tighter monetary policies, this could lead to a reversal in the dollar's depreciation trend, particularly if the Federal Reserve signals a shift towards a more hawkish approach in its next meeting.
Hello, and welcome to this At Any Rate podcast. I'm your host, Arindam Sandilya from J.P. Morgan's FX Strategy team.
I'm joined today by my colleagues Ben Jarman, Patrick Locke, James Nelligan, and Octavia Popescu. Now, I have to admit, it's not easy getting folks excited about FX these days with the dollar going into a range over the past two months, following this huge decline in Q2. Part of this calm is probably the natural consolidation rhythm of currency markets after big moves.
There are certainly no Max 7 type perpetual motion machines in our markets. And partly, it's the dog days of summer, I suppose. Vols are at bargain basement lows everywhere and participation is thin.
But as we've been writing in our recent publications, under the hood, we think that the underpinnings of the dollar bear trend are actually getting healthier. Positions are now much cleaner by some yardsticks. More than half, probably closer to three-fourths of big dollar shorts have now been cleansed.
US real yields have ground lower over the past three months, which has closed some of the dollars under valuation from before. And one has to acknowledge that the incremental news flow around institutional Fed credibility has arguably been a dollar negative, but it hasn't had a durable effect on the price so far. So on the whole, we are feeling that the decks are now cleaner for a renewed run lower as the Fed starts cutting next month.
But on the cyclical side, we've been getting a couple of questions as stress tests to this view. First, one common concern amongst clients is whether US exceptionalism as measured by equity market strength is returning. Could it push the dollar higher from here?
And a rejoinder is twofold. First, better than feared US growth in Q3 due to tariffs eventually biting is not just a US-only story. When we look at our rankings of growth forecast revisions across G10 and EM countries, US is distinctly a mid pack on that league table.
Cyclical versus defensive stock performance is also happening on a broad basis. It is not just a US phenomenon. So US activity does not look exceptional to us, number one.
And second, one has to view better growth in the broader macro context of especially what inflation is doing. Now, you can always goose growth by running a hot economy predicated on easy money and easy fiscal. And the vast history of high yielding emerging markets tells us that those environments are usually positive for local equities in local currency terms.
But it is almost always currency corrosive through the real yield channel as inflation expectations rise and long ends of yield curves, price and more term premium. This is in fact what's been going on in or at least a version of it going on in Japan in recent times. And the frustrating lack of follow through stronger in the yen is a poster child for why this kind of policy mix may not deliver FX strength, even in DM.
And then there's a second question about flows. You know, we obsess about flows in our markets. Do we worry about dollar strength if the rest of the world steps in to buy a ton of US equities?
Well, our answer is it did in June. And that's what tick data that we got late last week suggested. And yet the dollar fell and fell substantially in June.
Also recall that by June, the spec community was actually quite short of dollars. The dollar was undershooting on cyclical models. The narrative was very entrenched, very mature, all of which made it a ripe starting condition for being shocked by such a large flow.
If you still did not get dollar strength after all that, then I suppose the burden of proof is on the proponents of this thesis to answer why not and what needs to change in order for you to get a different outcome. So Pat and Octavia, you guys have done a lot of heavy duty digging into this. So we should delve into this flow data a little more in just a little bit, given the huge interest in this topic.
But first, given time zones and in the interest of letting Ben Jarman and Sidney get off at a respectable hour on Friday, when we are recording this podcast, Ben, let's start with the RBNZ shocker this week. You had an out of consensus call for a hold that did not work. You've had a couple of days to digest the decision, how you taking the disappointment?
Where's your head at on what happened and what did we learn? Thanks Ari. Yes, they did surprise us more than others this week.
Not so much, I guess, the decision, which you know going in is tight when you're against the pricing, but more so with the message. They talked about being on hold, a cut 25 and a cut 50. The 50 clearly is a surprise.
They lowered their OCR projections while raising their inflation forecasts, which now test the top of the band. In doing that, they've seems to have put quite a lot of emphasis on a weaker GDP tracking in 2Q, even though ultimately their forecasts for GDP didn't move on net because they upgraded the first quarter. They've also opted to essentially not wait to measure the top in inflation, which they're forecasting in 3Q, which is quite contrary to the guidance they had over the last couple of meetings.
So, you know, the shift here in the surprise for us is essentially it's real rates lower for the same growth path and a clear sense that they're not tolerating any faltering in growth momentum. Earlier today, the RBNZ's chief economist, Paul Conway, seemed to walk that tone back a bit, saying that the activity dip will probably be just a short run phenomenon and policy doesn't need to be overtly stimulatory, but, you know, the immediate damage is done. So where this leaves us is that we've pulled forward the remaining 50 basis points of cuts that we have in the forecast for the RBNZ, which, including this week's move, lowers our terminal rate by 25 basis points.
There is this tension with the RBNZ having kind of moved ahead of the schedule we expected between growth and financial conditions, which has been playing out for a while now, and I think continues to be the relevant question for Kiwi. Yeah, I mean, that was going to be my next question is now that even to alter your monetary policy path, what does that mean for the broader Kiwi macro economy? Are you looking for a faster rebound?
And does that therefore also mean that even as Kiwi dollar is suffering from the consequences of this rate cut earlier this week, is it also due for a relatively sharp turnaround in the not too distant future? Yeah, I think that broader cyclical context is really important here because, you know, I view this easing cycle had been that they'd cut sharply more than 200 basis points inside a year from August last year, but we didn't expect that to be overly negative for Kiwi FX in the sense that it was finally catching down to where the data had been. Kiwi had been the stagflationary poster child of this cycle.
Rates have stayed far higher for far longer than they would have, particularly given that they were the first central bank to start the tightening cycle, because the RBNZ didn't feel that they had the luxury of setting policy with respect to their inflation forecast and they needed inflation to come down sufficiently before they could respond. So once easing was underway, we thought it would start a growth recovery, which would allow the RBNZ to be on hold for a while from mid-year. That path had broadly been tracking because GDP and the surveys have picked up from last year's contraction.
They now flag annual growth of, we think, around 1%, so certainly not stellar, but given where they had been and when you've eased a lot and you still have further lagged easing coming through the lower mortgage rates, which refreshed around half the mortgage stock, refreshes to lower rates over the next six months, it's easy to consider this kind of accumulative lag effect sort of building up. Judging by the RBNZ press conference, there is still sympathy for that view from the internal members like Silk and Conway. So the implied lower path of real rates here, you have to acknowledge it undermines Kiwi's carry profile near term, but you're adding that to this extra easing and the proxy easing that's coming anyway from mortgages.
So with the committee seemingly putting more weight than usual on one quarter of GDP does, in our view, store up leverage to any further recovery in the data. And we did get a little bit of that in the last week's worth of PMIs and PSIs. There's also, just to finish, a little bit of valuation support for Kiwi here.
And to your point on the dollar and potential Fed capitulation, if you're in this quadrant of Kiwi rates, somewhat tracing Fed expectations lower while stoking domestic growth expectations up, that's generally a decent quadrant for Kiwi performance. Understood. Thanks, Ben.
After digesting that RBNZ drama, a quick one on, I guess, Jackson Hall, you can't have a podcast today that doesn't touch upon what we've learned from Chair Powell over the last couple of hours. Patrick Locke, what is the view from Stateside? Yeah, thanks Arindam.
Look, I think the delivery was pretty straightforwardly dovish. I mean, I personally, and I think a decent amount of the market was coming into today with some expectation that like, yes, he would nod to recent labor market weakness. That wasn't going to be a surprise, but perhaps that he'd be a little less flexible on the messaging around inflation, given that basically everything since CPI has come in either relatively firm or kind of inflecting higher or both.
And so it was quite interesting then to read that, I guess, again, he did nod to, you know, weaker labor market conditions and the balance of risks kind of tilting. But to me, what really stuck out, I think at the end of the day was just kind of saying more explicitly that the tariff induced price spike in inflation more broadly is, you know, their central scenario now is that it is really kind of a one-off and that's not going to let them get in the way of addressing other risks, you know, to the dual mandate. So realistically, I think the delivery was such that it obviously significantly increases the likelihood of September where the market had obviously been getting a little bit more wishy-washy on that the last couple of weeks or so.
I don't think it goes so far as to raise the odds of 50. I think that'll be entirely predicated on the payrolls release. I don't think there was enough in the messaging here, you know, today for that.
But nevertheless, I mean, it's been taken as a pretty significant diverse surprise. You can just see that on the charts, the XY is down a percent, the short ends down about 12 basis points. So I think not a lot to kind of, you know, misinterpret here.
The Fed's going to be using, you know, before too long. And, you know, we have been looking for a little bit more of an obvious, you know, pivot to kind of like recatalyze that dollar down, especially after some period of consolidations and moderate strength in July. And after even today, this week's kind of tactical run up.
So I think it's helpful for the review, for the view in that respect. And we'll see kind of how the rest of the cyclical data play out in the next couple of weeks before that Fed meet in mid-September. With that, I'll turn to you, Octavia.
You and I have recently been doing some joint work trying to evaluate kind of the state of the play on the dollar, you know, the flow backdrop, a lot of obviously interest in that around the post-liberation day kind of 2Q period, questions about capital repatriation hedging. You know, what did you find that really stood out to you in the recent releases across TIC and also kind of the latest hedging data that you have? Hey, Pat.
Yeah, sure. The bottom line to me is that the flows pillar of the dollar bear story is looking like it's going to be less supportive or less intense going forward. But as we've seen, that can be compensated by US cyclicals and speculative flows.
So for some context, earlier this year, we observed this large stock of US equities held abroad that we thought could be rebalanced to weigh on the dollar in two ways, either via outright repatriation or via higher hedge rate flows. And on the former, we had some signs of that in April, and especially in some countries like in Sweden, it played out over several months and helped the currency. But overall, that was short-lived.
And in May and June, we saw huge equity inflows into the US again, which pretty much poured cold water on the notion of a broad exodus from US assets. Now, I would expect this repatriation angle to become relevant again, if you have, say, a large equity drawdown and there's panic selling. And in that case, if you're looking at the largest holders, that helps you see which currencies might be more buffered or supportive than others by at least short-term repatriation.
But for now, there's no obvious catalyst for more capital outflows from the US. And how it's looking, there's big inflows. On the hedge ratios, we also observed that at the end of last year, hedge ratios were at decade lows in most EM countries where we have data, and so had a lot of scope to rise given the increasingly positive US dollar-US equity correlation.
And where we have timelier data, we do see that this has happened. So that's Canada, Finland, and Denmark. And actually, in Denmark, we have monthly data, so the timeliest.
And we saw a sharp 12th percentage point rise in the months to April, after which it flatlined thereafter. So extrapolating from that, the quick movers have likely adjusted, and the process is maturing and likely to be less intense going forward in the second half. And so putting together repatriation and FX hedging, it's likely past its tactical peak for the dollar.
But what is reassuring is to see how in the face of these huge US equity inflows, the dollar still sold off, which suggests that US cyclicals and speculative flows do overwhelm portfolio flows. But also perhaps that these are happening at a higher FX hedge rate basis, and so are inherently less of a support for the dollar. Otherwise, digging into the tick data for June, there's a few things that stood out to me.
Firstly, that it was led by external surplus economies. So you had Singapore, Norway, Switzerland at or near record purchases, and also large buying from other Asia surplus economies like Korea and Taiwan. And then second, after a sharp exodus from February to April, Swedish net purchases were citable again in May and June.
And there was a similar pattern in Israel of reverting to buying US equities again. And otherwise, Canada and China continue to be the largest sellers of US equities. And last thing I'd say, official sector purchases in particular were unusually large.
So private sector purchases were as well, but the official ones really stood out, which also includes the sovereign wealth fund. So that also goes together with the largest buyers that I mentioned earlier. And still overall, so I mentioned that the huge equity inflows into the US didn't dislodge the dollar downtrend in June.
And even looking at the global FX cross-section too, there wasn't a negative correlation that you would have expected between currency performance versus the dollar and US asset purchases from that country. So that also was more reassuring to see, even if these inflows into the US continue. Great, thanks Octavia.
So bottom line there, the capital repatriation flow never obviously materialized that much outside of April. Hedging has been ongoing, but it was a fairly probably mature stage at this point. So yeah, I think I'd agree.
I'd expect the intensity of the overall flow picture to diminish in the second half, but as you allude to, that doesn't necessarily preclude dollar weakness. I mean, I think that's clearly evident after payrolls. It's evident today, a lot of other factors here contributing to the dollar down view.
So just keep that in kind of the back of the mind, how that's operating. But James, just to wrap up with you, a couple of notable developments this week out of the UK, CPI release, and then also PMI in the context of the European block, having some pretty decent numbers there. What's your latest read on that?
And how does that kind of go into the overall sterling view right now? Sure, thanks Pat. So we got that sticky CPI print.
We got a stronger PMI, particularly on services. And then obviously over the last few weeks, we've also had the hawkish BOE, the beat on Q2 GDP. But I'd say sterling's not really as strong as that would imply.
And that's really what stands out. So you'd expect maybe euro sterling to maybe trade a little bit on the cheap side of fair value as those things have played out. But actually, euro sterling is actually hovering slightly above fair value at these levels.
I think that just tells us that the focus is a little bit away from the data at the moment, perhaps on the moves in long and gilts, the continued kind of pressure on the Chancellor in the UK after floating a range of UK tax policy options this week, as we build up to the autumn budget. And if we're trying to model euro sterling, as I say, it's pretty close to fair value. There's very little fiscal risk premium in the currency.
And I think as we get into September, what we think we'll start to see is just some position reduction, as investors keep the budget in mind and want to maybe lighten up on some of that risk. And I think that can start to bake in some fiscal risk premium as we head into the event. Got it.
Thanks very much, James. I think we'll leave it there for this week. Thank everybody for listening.
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 August 22, 2025.
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