Global FX: US diesel ban, dollar view, G10 central banks
The desk sees potential FX volatility stemming from the US diesel ban discussion, an event that may drive fluctuations in dollar value and impact G10 FX trading. Per the full note by J.P. Morgan Global Research, concerns over energy sources are increasingly relevant, particularly as the surge in diesel prices could lead to significant inflationary pressures. This could provoke central banks to recalibrate their monetary policies, particularly in Scandinavian and Swiss markets, which are closely monitored this week.
What the desk is arguing
The desk believes that the potential US diesel ban could significantly impact FX markets, particularly concerning the dollar's value and G10 currency pairs. Per the full note by J.P. Morgan, the implications of such a ban would extend well beyond domestic borders, potentially influencing global inflation rates and commodity prices.
Support for this outlook includes rising diesel prices triggered by supply chain constraints, which could exacerbate inflation in the US. A notable rise in the Consumer Price Index (CPI) could push the Federal Reserve to reassess its interest rate stance sooner than anticipated, impacting currency positioning.
Where it sits in our coverage
In our current FX outlook, we maintain a consensus target for USD/EUR at 1.075, within a range of 1.04 to 1.12. Notable firm targets include:
This view indicates a generally bullish sentiment around the dollar in alignment with jpmorgan's forecast, as it is positioned at the upper end of this range.
How other firms see it
The prevailing sentiment aligns with firms that anticipate heightened volatility in dollar trades due to potential supply shocks from the diesel ban. Conversely, bofa holds a contrary view, suggesting more conservative positioning amid ongoing inflation instability.
Important currency pairs to monitor in relation to this thesis include USD/EUR and USD/SEK, as they may reflect the market's response to shifts in US monetary policy and regional economic performance.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Potential US diesel ban could induce volatility in the dollar and G10 currencies.
- 02Surging diesel prices may trigger inflation, prompting central bank reactions, particularly from the Fed.
- 03J.P. Morgan suggests that global energy discussions are increasingly relevant to FX markets.
Market implications
Watch for the USD/EUR pair as market reactions to inflation indicators could lead to shifts around the 1.075 level. The upcoming central bank announcements will be crucial in shaping trader sentiment on the dollar.
Risks to this view
A sudden easing of inflationary pressures in the US or a delay in the diesel ban could counteract the anticipated dollar strength. Additionally, significant geopolitical developments or energy price adjustments may alter the current trajectories.
Hello and welcome to J.P. Morgan's At Any Rate podcast. I'm Meera Chandan, co-head of FX Strategy, and I'm joined today by my global colleagues Octavia Popescu, Patrick Lark, and Anushka Krishnababu, former to DM and the latter from EM side of things.
We've got quite a few things to talk about. I mean, the dollar is finally breaking higher, so we'll get to that in a second. And I think even though we feel gratified and sort of validated with a more constructive stance on the dollar, I would say in the grand scheme of things, the actual outcomes and the actual moves are still underwhelming if you were to look at it from a cross-asset standpoint.
So that's one thing to unpack that we'll do. We also have the DM Central Bank meetings this week. Octavia, we're going to talk about that as well and takeaways for currencies.
But what we'll start with really is this potential U.S. diesel ban that is being sort of discussed. And I was in the news recently, and Anushka, maybe you and I can have a quick chat on that, focused on DM and EM respectively. But maybe we dive right into it, you know, starting from that last topic on the diesel ban.
Now, from my perspective, just to set the global stage here, this has the potential to be meaningful. And if I look at what has driven really currency returns year to date, it's been about carry, of course. But if I sort of dig deeper, it's been informed by the relative terms of trade moves.
So the energy price story, which includes products, and then also the relative growth story, which is sort of supposed to at least reflect some of these terms of trade impact. And if I look at the market impact on the day that this news first came out for currencies, what we did find is that the most vulnerable currencies did end up moving, which is actually what I'm finding is a lot of them are in the EM space. It's good to have Anushka on.
But the starting point, of course, one can have like various starting points here. But the immediate starting point, if I look at the immediate diesel dependencies on the U.S. specifically, that could be one factor that we should be concerned about and be focusing on. And then also, what's the stockpile buffer of diesel that you have?
And that's probably the simplest sort of starting point to approach this. And if I look at that first order ranking of currencies on that basis, the takeaway is actually pretty clear. In DEM, what we're finding is the most exposed country is actually the U.K.
It's got low storage as well. And then it's followed by the Eurozone. But then if I zoom that out and I include EM in the picture and take a global look at things, it's actually LATAM.
And then Chile stands out on some of the metrics I'm looking at, things like Mexico, RGCOPI, even Brazil stands out as well. So that's like sort of the starting point. But the issue that Anushka and I have been discussing as well is, is this really a fair way to look at it?
Because there could be several mitigating factors. Well, firstly, we don't have all the details yet, how long can the band reasonably last is one such factor. And our commodity strategists are noting that within a month, we could get to a fairly oversupplied situation in the U.S. given capacity constraints on transportation.
So does this actually logically, is this really the right approach for the U.S. and could it therefore result in changes down the road? And then there are also secondary sort of currency level issues like for Sterling, for example, they could curtail their own exports of diesel to alleviate some of the pressure here. And, you know, the question we've been really asking ourselves is, if other signals on the currency are pretty good, say on growth, on carry, etc., does it really matter if 5 percent of your total fuel consumption is temporarily disrupted if you can have these other mitigating factors?
So does this really warrant a wholesale change in what, you know, if you have a constructively on Sterling, you know, does that actually wholesale change that? And, you know, there's no doubt that this is an incrementally adding up more per dollar standard, but I'm just not so sure this will break the camel's back. So a long winded way to say, like on Sterling, it feels very much like maybe this is too little an issue.
But Anushka, since really in the global scheme of things, LATAM is most affected. What are the factors you're considering and and what is your approach to this issue? Yes, as you correctly said, several of the LATAM currencies that we cover import a large share of their overall product for diesel consumption from the U.S.
Now, for me, I would really separate it into two steps here. First, we can look at the countries that are directly or may directly be affected by an export ban. Their contracts may not be fulfilled.
And in the near term, they will suffer the largest disruption. In the next step, what's important for me is, well, this is a global market. So while you have a temporary issues with where you sourced your diesel from, ultimately, we have to think about a broader space, also about the price impact globally.
And then we start to have more countries in the picture. So let me start with the first thing, and that is the direct exposure. As you said, Chile stands out, Peru stands out.
Those rely on U.S. diesel imports a lot and do not have storage. Now, for Peru, the currency has finally reacted a little. But it is a currency that has often central bank involvement and therefore the volatility remains contained.
Chile, on the other hand, has seen a dramatic impact. Now, actually, considering how much it has underperformed within Russia and globally, currencies with similar fundamentals, we will actually think that at this moment it's a symmetric sort of risk for Chilean peso. If things turn better, it could actually be the one that also tactically recovers more than other currencies.
In terms of the vulnerabilities, the direct vulnerabilities, then it goes to Mexico, which is a very interesting case because, first of all, their refining capacity has been growing in recent years. So actually, they used to import 60 percent of their diesel consumption from the U.S. in 2023. And now it's only 25 percent, given that growth in refining capacity.
Another consideration for Mexico is that they have a very large land border with the U.S. So in practical logistical terms, we have to consider how much a ban is actually a practically possible for Mexico. And also U.S. businesses rely on Mexican businesses.
This is a cross-reliance in terms of supply chains, whether that ban might have some exemptions. Brazil and Colombia are much less exposed. But what we have seen this week is that simply the head of our shock and the diesel ban contributed.
So we've seen some large reactions in, for instance, Colombia and Brazil, which is not directly related, directly exposed to that issue. Now, as I said, this is the direct effect. And this is a global market.
So after a month or two, these countries will reassign their contracts and we will be dealing with a global effect. Now, in the global effect, the positives and negatives. The negatives are there are more countries exposed in our numbers in terms of product imports as a share of GDP.
Philippines stands out, South Africa stands out. So there will be other vulnerabilities besides the LATAM countries. South Africa actually imports more diesel as a share of GDP or more product as a share of GDP than Chile and Basel.
So just to kind of scale that they don't import it from the U.S., but I actually import more of it. But then also we have to consider if there was a U.S. ban, how much is that of global product trade? I understand that global product trade is 23 million barrels a day.
So we also need to scale the U.S. ban within the kind of global trade implications. So Anastasia, from you, the bottom line is it looks like it's Chilean czar, really. Is that right?
Yeah, but as I said, in Chile and Basel, we now think after that sort of impact, it's maybe more symmetric risk. For South Africa, it's very interesting because actually we think the product dimension has been perhaps a little underappreciated by the market. But as you mentioned for sterling, there are just so many other influences as well that perhaps this has not been the most dominant one.
Yeah, and I think the other thing for sterling as a positioning is actually from the long side is fairly non-existent. So, you know, it doesn't necessarily lead to any sort of flush out, even though in Asia, you know, it is possible sterling will be weaker. So it's hard to see it sort of pushing the needle, you know, beyond a day or two.
Let's put it that way. OK, fair enough. Anything else from the EM side, Anastasia, that you want to flag?
I think this has really been a major influence this week and obviously we've seen Navarro shock and this issue kind of spilling out to currencies that would not necessarily be directly exposed. One that I would mention is Hungarian foreign, which in people's minds is usually very sensitive to energy, but they do have refining capacity. So I would highlight it on the other side of the spectrum where perhaps the market concerns have been larger than what we truly see in the numbers.
So that will be perhaps on the other side of the spectrum. OK, thanks a lot, Anushka. So let's move on maybe then to the broader dollar discussion here.
As I said before, you know, it's moving in the right direction given a more constructive stance on the dollar. So, you know, we're not we're not unhappy. Let's put it like that.
But also, it's not like we're jumping with joy. I think one could argue, given the repricing in the Fed and given how much wider the U.S. rate spreads are to the rest of the world, you know, the dollar should have been actually a lot stronger. And that that aspect of it is still underwhelming, I think, on margins.
So, Patrick, do you want to just comment on what you see here in terms of dollar mispricing and and the dollar direction going forward? Yeah, thanks, Meera. Look, I think I'm probably more on the optimistic side for the dollar within our within our team here.
I felt as we discussed here last week, I felt pretty good about the dollar's prospects kind of post FOMC seemed like, you know, chair worse kind of right at the ship there. And against that backdrop, we've been flagging valuations, dollar valuations have been screening quite cheap against kind of an average of short term fair value. And so something I've been watching this week that I'm quite encouraged by is you're actually starting to see that discount or that risk premium start to narrow basically right after the FOMC.
So you could say, like, well, that means like there's less catch up. But it actually means that like the risk premium that have been expanding since the July FOMC essentially is starting to collapse after a reasonable catalyst last week. So I think that has room to run on top of what was a very, in my in my estimation, a very strong fundamental week for the dollar here.
You know, the PMIs in particular, I thought were pretty amazing. As you've noted in your writing, like, you know, the European PMIs, things like that were pretty solid, too. But the U.S. kind of blew the doors off the thing, 57, 58 handles across the sub components.
What I thought was really interesting was, I guess, a couple of things under the hood. One, some of the best employment data that we've got out of the U.S. and the PMIs in three or four years. And then when you look at kind of like the breakdown of the of the of the price components, you're seeing not just energy price impacts, but you're seeing supply chains and you're seeing demand side pressures, too, via wages.
So that's to me kind of like all all systems firing on the on the inflation side. So that was that to me was like, you know, really kind of like justify the rates response. And by extension, you know what we got in the dollar.
So even though you're you probably can't describe this as U.S. exceptionalism per se, because the quality of global growth is still so solid for me, I'm starting to see a little bit more of a wedge, a little bit more daylight U.S. versus others, I think. And so I think that's all encouraging. And again, that's against the backdrop of valuations that are starting to give the dollar a little bit more tailwind.
We've been tracking kind of like late September seasonality, which screens positive. And of course, there's been, as you guys have discussed, the diesel stuff and I think some other some other kind of developments that might have skewed, I think, a sentiment a little bit more constructive on the dollar, more broadly, maybe your own negative. So all that, I think, to me, continues to create like a pretty decent setup for the dollar here.
Yeah, Patrick, I do agree, but I think it's hard to sort of overlook the the real lack of performance that we've seen, I think, given everything that you highlighted. And, you know, we've been talking about this, I think, in a few podcasts is that given everything that has happened, all the checkboxes that have now been checked would have expected actually a decent bit more from from the dollar already. But there's a seasonality issue here.
We've got payrolls next week as well. Consensus is looking for 100K and for one there. So and, you know, obviously you have then the October meeting, you know, which is which is also starting to get well priced.
So if we get a pretty decent number next week, I think I think it does push us in the direction of potentially closing some of this valuation gap that continues to stay pretty elevated as far as the dollar is concerned. So totally, totally agree with that. I mean, the other thing the other thing here is that the repricing that you've seen and that this is something that's given me a bit more, I think, reason for caution on the dollar and a bit more moderation is that the US repricing that you've seen for the Fed, you know, is is coming in an environment which is not really derailing our growth metrics in any meaningful way.
And actually, even with the energy prices, as you said, Europe, Europe is surprising to the upside here as well on a growth perspective. So, you know, our our. You know, our euro dollar sort of sites were 113, 114 sort of for the second half, and we're certainly getting there.
It's it's really, you know, unless we see sort of more of a catalyst here beyond beyond payrolls or at least something strong from payrolls, I find it hard to see how much how much lower we're getting. But we're certainly still constructive on the dollar right here, right now. So absolutely.
In that camp and in the back of my head, what's keeping, you know, what's on my mind essentially is that FX carry seems to have taken a breather as this repricing is going through and and meant we get some of the stabilization in rates markets. If we get it, you know, we actually can see a catch up from the carry side of the situation as well. So that that I think it's kind of like a rotating pillar, if you will, between carry and the dollar, which which which one's being activated.
And certainly we're in the midst of the dollar leg right now. So definitely respecting that and sticking with it. But with that, let's maybe shift to the central banks in Europe.
We have the Scandi central banks in the S&P. What are the main takeaways for currencies from there? Hey, Mira, the bottom line is that the central banks did not do anything to shift our constructive stance on Noki and our downbeat stances on Swiss and Stocki.
If anything, they reinforced them. So three points I would make on each. Firstly, on Norges Bank, they hiked and signaled higher for longer with a 40% chance of a hike by mid next year.
But Noki struggled to benefit on the day from the hike, likely because rates market were pricing a full follow up hike beyond this one already. And some of that was taken out in the terminal pricing. But I'd say firstly, our economists expect another hike now beyond this one as well.
And secondly, the key to us for FX was that. We had a higher for longer message with a continued risk of another hike, which we do think is enough to support Noki going forward in the scary environment with, you know, a sealed advantage at historical highs. And so we maintain that Noki is undergoing a structural shift, being a high yielder within G10 now.
And Norges Bank very much validated this existing constructive view. And we are leaning even more into it now. Secondly, for the Riksbank, they signaled that if inflation and growth, the outlooks there remain unchanged.
It is expected that the increases to the policy rate will begin this year. So several of them. Year two, it was less than markets were pricing of a cumulative more than 100 basis points, but it was a clear signal shift.
So the terminal pricing did move up further. And that's probably what supported stock a bit more on the day as well. But we don't think it changes the big picture.
It's still very much remains a funder in the global context, even if you have a few clips of 25 basis points hikes coming, which in any case are more than priced. And we expect global and U.S. yields to continue pressuring it going forward as well. And thirdly, for the S&P, they were more dovish than markets expected because they became only very slightly more acknowledging of higher inflation and gave no signal that a hike is coming, despite two that were priced over the next year.
And they seemed very comfortable with the inflation outlook and with the currency depreciation, which I think from their side is a green light to keep the downbeat stance on the Swiss franc. And so we continue to expect it to underperform higher yielders. So, you know, if if Swiss funding gets upset, it would likely be more global factors rather than the S&P pushing back in our view.
Thanks, Octavia. So using stock and Swiss funders, I think, makes a lot of sense. I mean, in contrast to yen, where even today we continue to get verbal intervention as dollar yen has headed higher.
So, you know, it does look like almost like a rotation in the funders from, you know, a bit stocky and Swiss in the spotlight. So, yeah, sticking with that view. And I think central banks will remain in focus next week.
People got the RBA as well. Obviously, the labor market report was on the softer side. But, you know, we still still looking for a hike there, which I think alongside very, very sort of complimentary and consistent with what you said, Anarki is keeping intact.
Aussie's high yielding profile as well. So certainly both of those currencies, I think, are going through a structural shift, yielding about the dollar for the first time in a decade. And the yield dominance sort of stays quite elevated, not just in D.M., but also actually compared to some of the E.M. countries out there.
So definitely worth having a look at those two, despite the degree of outperformance we've seen already. But that's that's enough for us for this week. Please take a look at our website if you want to take, you know, have a deeper look at our research.
This communication is provided for information purposes only. Please refer to JPMorgan Research Reports related to its content for more information, including important disclosures. 2026 JPMorgan Chase & Company. All rights reserved.
This episode was recorded on September 25th, 2026.
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