Global FX: Update on systematic FX signals and EM currencies
This week, J.P. Morgan's research highlights an upgrade to overweight (OW) on emerging market (EM) currencies, fueled by a positive shift in systematic FX signals and favorable dollar dynamics. Per the full note source, the strategists emphasize the ongoing resilience of the dollar despite conflicting macroeconomic indicators, which positions EM currencies favorably as global risk sentiment improves. The desk suggests that a drop in U.S. Treasury yields amid a dovish tone from the Federal Reserve could further bolster this trend. With no major market events in the pipeline, traders should remain vigilant to shifts in positioning that could influence short-term price action.
What the desk is arguing
The current commentary by J.P. Morgan's strategists articulates a bullish outlook on emerging market currencies, presenting an upgrade to OW status supported by encouraging systematic FX signals. This upbeat assessment underscores the dollar's recent strength, enhanced by the Federal Reserve's potential easing stance, which remains a key driver for FX dynamics across markets.
The commentary also notes specific signals indicating an improving global risk environment. Lower U.S. Treasury yields, signaling softer monetary policy, are seen as conducive to EM currency appreciation, suggesting a potential upside for traders willing to engage in these markets. Strategists anticipate that as economic data continues to moderate, the dollar's dominance may wane further.
Where it sits in our coverage
Given the updated thesis, J.P. Morgan aligns with a consensus target of 1.075 for key currency pairs with estimated ranges appearing as follows:
The desk's call aligns closely with jpmorgan's high-end target while diverging from bofa's more cautious stance. Their optimistic positioning suggests a potential bullish bias among institutional players.
How other firms see it
Firms such as jpmorgan hold a similarly positive view on EM currencies, suggesting a broader consensus on weakening dollar dynamics supporting riskier assets. Conversely, bofa remains skeptical, portraying a more guarded outlook on dollar strength in the near term.
An important consideration for traders is the EUR/USD trajectory, which is likely to reflect changes in the ECB's policy decisions in conjunction with U.S. economic performance indicators. This interplay could significantly impact positioning in EM currencies.
01J.P. Morgan has upgraded EM currencies to overweight status amidst a resilient dollar environment.
02Systematic FX signals point towards improving risk sentiment globally, favoring EM assets.
03U.S. Treasury yields are declining, potentially benefiting EM currencies further.
04The firm consensus indicates diverging targets, reflecting different views on dollar performance.
Market implications
Watch closely for any shifts in U.S. Treasury yields as they serve as a barometer for broader market sentiment. Additionally, monitor positioning signals in emerging markets, which could indicate increased capital flow in response to favorable conditions.
Risks to this view
A reversal in this outlook could stem from unexpectedly strong U.S. economic data or a hawkish pivot from the Federal Reserve, prompting a reassessment of dollar strength and, consequently, EM currency performance.
Hello, and welcome to this week's At Any Rate podcast. My name is Pat Locke. I'm with Global FX Strategy Team here out of New York.
Please be joined by my colleagues Antonin Dallaire out of London, who runs our systematic strategy in FX, and Anushka, who does our EMEA and broader kind of EM top-down FX views. Thanks, guys, for joining. Look, from my perspective, I was out a couple of weeks, so I missed a lot of the action last week.
A bit of a calm down this week. Things seem to stabilize. A few things, though, obviously, in focus.
I mean, first, my sense of the U.S. data coming out was that it does kind of reinforce or reaffirm the recent trends that we've been tracking on the U.S. side, which is just generally kind of an ongoing moderation and some kind of like stagflationary-like kind of dynamics. You saw that in the ISM services data, for instance, where prices to make new cycle highs, but demand indicators like orders, order to inventories, employment continue to run at relatively weak levels and lower than the prior months, so not particularly encouraging there. Claims, no smoking gun necessarily, but at the same time, continuing claims also made a new cycle high.
That was after a period of stabilization, so I don't want to, you know, overemphasize how dramatic that was, but I do think that is consistent with the NFP signal, which is effectively, you know, pretty modest overall employment growth, no signs of actual labor shedding yet, but nevertheless, continuing claims moving higher, consistent with kind of a slow bleed up in the unemployment rate, which was, you know, close to 4.3%, you know, going out a few decimal points. So I thought that was interesting and notable and kind of just, again, consistent with how we've been thinking about that from the dollar side, and then obviously kind of the other main developments this week were on the central bank side. Certainly, I think the BOE caught a lot of people off guard.
We thought, you know, there was scope for a more obvious dovish pivot at the meeting given just kind of the scope of the weakness on the labor market side. Instead, obviously, the BOE chose to focus a little bit more on kind of the inflation side of things that manifested, obviously, in four votes for no change. They raised the inflation forecast profile.
They dropped kind of the two-sided risk assessment to inflation. So again, kind of suggesting that the risks are a little bit more to the upside now, more explicitly. Altogether suggested a little bit almost of a kind of a reaction function shift from the BOE, implicitly kind of suggesting that that labor market data weakness that I think a lot of the market had been focused on is not necessarily going to manifest or pass through to a disinflationary process as one would normally and otherwise expect, which seems to suggest concern about a little bit more inflation persistence generally and some kind of systemic changes in inflation behavior.
So obviously, you had a decent kind of repricing out the BOE OIS strip. All is not lost, I think, on this case for the sterling bears predicated on the data. Our rates colleagues, for instance, think that there's not enough of a discount price for a cut in November.
But obviously, this does pour a little bit of cold water on the hope that the BOE would kind of double down on the weak activity side of the ledger, see a little bit more prospects for disinflation, and that could catalyze a little bit more sterling weakness. And, you know, I certainly think that's notable given a couple of kind of growing consensus positions in the market, particularly euro sterling longs. We've been flagging that on the positioning side for some time.
And, you know, naturally, that has come under, I think, a little bit of pressure. I think generally speaking from a very medium term perspective, we're still holding to kind of a concerned and skeptical view of sterling. There's still obviously all the fiscal risk at the autumn budget coming up.
And the growth data is obviously still quite weak. But the BOE didn't kind of move in lockstep. And so, you know, a little bit of a setback.
But I'd say not all is not lost at this point. But then otherwise in the central banks, obviously, you had some notable developments on the Fed as well. Media reports, rumors, not confirmed, I would stress.
But it does seem like potentially Chris Waller might be in line for the Fed chief. Dollar response was interesting. It rallied on the back of that initial headline.
I do think that makes sense. You know, he's kind of more of a traditional institutionalist. He was kind of a, you know, he's perceived to be a thought leader and was generally kind of at the forefront of the more hawkish pivot, for instance, in the back half of 2021 when inflation started to take up.
So he has a long track record. And so the dollar's response moving higher to me was kind of a reflection of just depricing some risk premium of perhaps a little bit more perhaps unorthodox nominee or someone with closer ties. And so I thought, you know, that was that was generally material and interesting for the dollar.
And then in the same day, we had the announcement that Stephen Moran is going to be the temporary replacement for Kugler on the governor board. Dollar came off a little bit on that. But I think from our side, it's I think it's important to note that it seems like it's just a temporary nomination.
It seems like the administration is still exploring permanent replacements from January onwards. And perhaps that tempered some of the dollar selling. Moran, of course, is kind of the architect of the Mar-a-Lago accord thesis and is also opined in writing.
He's co-authored some pieces on Fed reform and Fed independence that I think the market started to revisit this week. But again, I think that, you know, that would become a little bit more salient if if it's not just a temporary appointment. Against this backdrop, our JPM economists have brought forward their Fed call now looking for a cut in September and then sequential eases into the end of the year.
So I think generally that's kind of consistent with you know, the dollar, the dollar lower call that we continue to expect. Euro dollar kind of encroaching that 120 level around year end. And so with that, I'll turn it over to my colleagues.
Antonin, I'd like to start with you first. Again, Antonin runs kind of our systematic strategy and obviously growth inputs are an important kind of factor in your work. There's been obviously a lot of like nebulousness, you know, kind of opacity, if you would, trying to determine lately where exactly we are in the US data cycle.
So interested to get kind of your read on what the cyclical signals are from a systematic perspective. And, you know, just how are you thinking about that with respect to the dollar? Yeah, sure.
Thanks, Patrick, for the intro. So, well, as you discussed in the first part, there is an ongoing debate on the resilience of the US economy. However, as the fix is kind of a relative market by nature, we have also historically looked at the relative growth performance across all countries through informal view.
And I would like to start a bit with that, like what is the balance of growth across countries doing? So if we look at what happened recently, that our economies significantly downgraded their growth forecast after Liberation Day globally. But since then, I would say around 80% of the 20 currencies I track, they are seen like partial or at least some partial upward revision.
So if you look at the short term sort of growth momentum trajectory across the board, it's quite upward. And we are not saying here that tariff globally will have no impact. But I would just say that our economies forecast as a crowd seem to indicate that it's less bad than what was initially expected.
So historically, this kind of move, I would say, is a decent environment for cyclical effects. And also, historically, it's quite a bearish dollar for the thing, for quite a bearish signal for the dollar. At least we have some systematic approaches based on this gross balance logic, which perform well on the dollar from, I would say, 2017 to last year.
That said, those are capitalizing on the dollar on cyclical properties, which have been unclear recently, as the dollar was sort of used more as a carry trade for a while. And the historical left hand side of the smile for the dollar has been challenged. So we stay relatively cautious on that.
But there is one thing that we can say regarding this growth momentum indicator globally, that the US is not leading the partial rebound that I mentioned previously, at least on our gross momentum indicators using this forecast, the economic forecast is ranked 17 out of 28, with significant regions above, like Europe, CNY, Antipodean, LATAM. If I look at on the combination of the gross forecast indicator that I mentioned before, and for instance, economic activity surprise indices, well, the dollar is among the worst ranked. So if we factor all this together, our bias or my bias would say that the backdrop is favorable for the performance of some of the cyclical effects of gross currency versus the dollar mostly.
Thanks, Antoine. And then, you know, against that, how are you kind of thinking about carry at the moment, you know, kind of a lower vol environment, we've seen, you know, discussions about people who wanted to kind of get back into that space. I mean, how are you thinking about the carry factor at the moment?
So, I mean, this is true that low volatility is always favorable for carry in any asset classes, I would mention, but our view is relatively unchanged since our media outlook two months ago. First, there is a really clear distinction to make here between G10 and EM, I would say. In G10, like, and my views are still a relatively low case to make for carry and the high yielders.
So it's going to be mostly dollars turning against the EM. Even after like the dollar sell off that we already had, in my opinion, we are still in a phase of carry to value rotation in the medium long term. And with like some of the DEM central bank against you, obviously, there is a question of timing that could be rebound, but the BOE Fed and Norgest are going to proceed in our view.
So it's against your carry portfolio. So we are not very positive on carry in G10. I would add also on top of that, that in G10 specifically, like it's far less yield differential stories than what we were seeing months ago.
We flagged previously earlier this year that external balances were quite relevant in the first half as, you know, countries with surplus were likely to do repatriation or hedge their exposure to U.S. assets. This theme has a bit weakened recently, but we also see some other themes which become more relevant as well as the pure differential story we had in the past years, like the fiscal outlook for different countries becoming more important as well. When carry was strong, for instance, if we take a small example, like if you wanted to model like yen crosses, the rates differential would have been your most important driver.
Here today, if you want to model yen crosses, probably a variable which can help you much more is going to be the 10-30 JGB curve to capture like the fiscal part of it. So I'm just using this example to say that we see other teams, in my opinion, that become more important than before. So we recently backtested, for instance, on currency or fiscal score.
Over 20 years, it's quite weak and very correlated to external balances. But the trajectory of the portfolio buying the best versus the worst fiscal outlook in G10 is more than decent this year. So it's just to say that the carry story is less important in G10.
In the end, it's a bit of a different story in our view, in my view, like a simple nominal EM carry basket, which ultimately involves quite some long position in LATAM versus some Asia on the other side, has reached a decent performance here to date of plus 6%, at least on the small basket we track. Considering how much EM carry sold off last year, a partial rebound sort of makes sense, especially if you consider the trajectory of other risk assets like equities since Liberation Day. But even in EM, central banks are more advanced, like a lot of them are still cutting, so the carry and yield dispersion is against you.
In my view, it's more a directional story for certain EMs and a very strong, favorable carry backdrop. When I also look at a bit of recommendation of our analysts globally, I see more mill yielders and often cyclic accuracy rather than necessarily chasing always the largest carry possible. But I think Anishka can shed more light on this for EM specifically.
Yeah, thanks very much, Anson. And I think the fact that the fiscal factor is kind of performing this year is intuitive, but obviously it's also interesting given that that's naturally kind of like your anti-carry signal, given kind of the inherent risk required for kind of those positions. But no, it's a good segue to bring Anishka in.
Anishka, you guys recently moved your EMFX call to overweight. Interested to hear briefly what kind of drove that and kind of piggybacking on the back of what Antonin was saying. I mean, how much of that growth and kind of carry signal value, how much does that resonate kind of in your space?
Thanks. Thanks for having me here. I would say a lot of what Antonin said resonates with us.
I think the key for us to move overweight EMFX has actually come really from that growth angle, further evidence that the U.S. growth exceptionalism previous theme is being unwound and also that Fed easing appears to be imminent, which historically is a very important trigger for dollar turns and kind of fast dollar repricing. Now, if I look at EM, the fact that so far, let's say growth performance or our forecast revisions have been very resilient. Yes, definitely.
That's a factor. In fact, one thing that stands out to me that we historically use is if I look at performance of EMFX, then growth in EM is being upgraded and inflation is being downgraded, kind of like a perfect case for emerging markets asset class. And usually in those periods, we get very strong performance for EM.
That's exactly the environment we've had. We've had upside growth revisions and downside inflation revisions for the EM space as a whole, which essentially is a Goldilocks for us. Now, going forward, though, we do have some concerns on that growth resilience.
It's very regional. I think that primarily the growth concern is in Asia. So, when we thought about that overweight in EMFX, we did have that in mind that perhaps going forward, what we've just said might not apply to every region in EM, probably two out of three regions it should apply to.
Now, in terms of the carry aspect, I must be honest, we do not think at this moment it's the major distinguishing factor. It is one of them, but we find that the reason we are bullish on, let's say, some carry currencies is also because they rank highly on some other aspects. It's not the carry itself that we are chasing.
It's more that we see that across a number of metrics, turns out that several carry currencies rank quite high. What I would say is that what we've looked for is perhaps slightly different. We're still a little bit more in the push factors in the dollar theme.
So, who can benefit from unwinding of US longs rather than necessary pull factors? I think the pull factors for us still rank a little bit lower. Understood.
Thanks. And I guess drilling down into that point a little bit more as well as your point about Asia perhaps not being the growth benefactor here, beneficiary rather. Which currencies, in short, do you kind of like, what are your preferred overweights here?
Yeah. So, for me, if I kind of look at the themes that we are looking at, some monetary policy desynchronization, so imminent cuts from the Fed while, let's say, other monetary policy cycles are already extended. When I look at the growth aspect, it seems to me that there's clear ranking on who gets hit on tariffs, which hits more Asia than it hits Europe or LATAM.
And then we have the push factors that I've mentioned, which is the rankings on NINP FX hedge ratios factors. And when I put it all together, for me, a pretty clear picture emerges where EMEA, EM as a region kind of ticks every box and should be the standout performer. We then have LATAM, I would say, is the next.
For Asia, it's very mixed because we really have to distinguish between the currencies that get the growth hit and don't have the NINP FX hedge ratio support, where some actually have it in a big manner, and that should overwhelm the outlook going forward. In terms of more interesting currency picks, so not just the regional views, but kind of drilling down, there are a few currency picks that I would tend to highlight where I think what has happened recently has given us great levels. So, we've had a sell-off, we had a technical correction.
So, we've basically read currencies that had the highest technical correction, and that gives you a good idea. So, the valuations have improved a lot, let's say, in Chilean pesos, South African rand, in some of the CE. If I could also highlight CE as a region, I think it's very interesting because that's where we have fiscal supports and EU fund support.
So, for me, CE region is particularly interesting in these themes. Got it. All right.
Thanks very much, Ineska, Antonin. Appreciate your color. I think we'll leave it there for this week.
Thanks, everybody, for joining. This communication is provided for information purposes only. Please refer to J.P.
Morgan Research Reports related to its content for more information, including important disclosures. 2025 J.P. Morgan Chase & Company, all rights reserved. This episode was recorded on August 8, 2025.