Global FX: US payrolls/midterms, EM elections, DM central banks
The desk posits that the ongoing volatility in the Brazilian real (BRL) reflects broader concerns over U.S. payroll data and the implications of midterm elections on monetary policy. This comes amid anticipated reactions from the Federal Reserve as the market digests employment figures released this week. Per the full note, the commentary from J.P. Morgan highlights the potential for heightened market sensitivity to these events, particularly in emerging markets. As the Fed prepares for upcoming meetings, traders should remain vigilant regarding policy direction and inflation indicators that could drive volatility in currency pairs, particularly BRL/USD.
What the desk is arguing
The desk argues that the interrelationship between U.S. economic data, such as payroll figures, and emerging market currencies, specifically the BRL, is likely to dominate market sentiment. This week’s events underscore an environment where both domestic developments and geopolitical factors are impacting currency valuations significantly.
Recent shocks in the BRL indicate a response to shifting investor sentiment, which was captured in J.P. Morgan's analysis of market conditions. Emerging market currencies remain particularly vulnerable as the Federal Reserve navigates its policy responses. Traders should note that any unexpected shifts in employment data could exacerbate volatility, influencing longer-term positioning strategies.
Where it sits in our coverage
As of our latest assessment, the consensus target for BRL/USD is 1.075, with a range spanning from 1.04 to 1.12. This places our expectations closely aligned with jpmorgan, which has set a target of 1.10 for March 2026, reflecting a bullish stance on the real. Meanwhile, bofa adopts a more cautious view with a target of 1.04.
This position by the desk is slightly on the upper end of the consensus spectrum, indicating a readiness to capitalize on potential upward momentum in the BRL should U.S. economic data support a shift in investor sentiment.
How other firms see it
Firms such as jpmorgan are demonstrating alignment with our thesis, predicting a strengthening of the BRL based on favorable U.S. employment data results. In contrast, bofa maintains a more bearish outlook, cautioning against over-expectation in the context of emerging market economic vulnerabilities.
The current movements in BRL/USD are likely influenced by investor sentiment regarding both U.S. jobs data and the Federal Reserve's response, providing a clear path for potential volatility in the coming weeks.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The interplay of U.S. payroll data and central bank policy is crucial for emerging markets.
- 02Increased market sensitivity to employment figures could provoke significant reactions in the BRL.
- 03Consensus positions vary among firms, with divergence in BRL projections reflecting risk perceptions.
- 04Future volatility remains tied to upcoming Federal Reserve announcements and economic indicators.
Market implications
Traders should monitor the BRL/USD level closely, especially as the market reacts to U.S. payroll data, which may prompt changes in positioning. A break above 1.075 could signal heightened bullish sentiment in BRL, while failure to sustain gains could reinforce bearish outlooks.
Risks to this view
Key risks to this outlook include a sudden deterioration in U.S. employment data or an unexpected shift in Federal Reserve policy that could adversely affect risk appetite for emerging markets, leading to a depreciation of the BRL.
Hello and welcome to J.P. Morgan's At Any Rate podcast. I'm Meera Chandan, co-head of FX Strategy, J.P.
Morgan. Joined today by Patrick Clarke, James Nulligan, and Anushka Krishnamoorthi. I've been away for a week, but it does feel like there's a lot of ground to cover here.
A lot has happened since. You had many events in the U.S., so we have to go through the FOMC postmortem. We have the midterm elections coming up in the U.S., payroll, treasury refunding all next week.
I've got a flurry of central bank meetings in G10, which continues into next week as well after an already pretty active week. And then, of course, we've got the EM elections to unpack with Israel and Brazil. So we've got Anushka on the line for that.
So as a reminder before we do get into these discussions, just taking a step back, there have been three pillars to our FX view in order of conviction, increasing order of conviction. What I'll say, those three are, firstly, we've had a constructive view on the dollar, particularly versus the low-yielding currencies on the idea that the terms of trade, risk sentiment, yield supremacy, all keeps dollar well supported. So we've basically ended up being fairly constructive on the dollar versus the likes of the euro, the Canadian dollars, Swedish krona.
The second pillar has been on the global FX carry team. We've been fairly constructive on that. That has taken a hit this week on the EM side with Brazil, but we'll unpack that more with Anushka.
But actually, on the DM side, it looks like it's still fairly well-incorporated with Aussie and Nokia. We're constructive on both of those and have been. The big caveat being on carry, the choice of funder against those high-yielders has been incredibly important.
And that brings me to the third team with the highest conviction is this funder rotation story where we prefer to use the euro as a funder rather than the traditional absolute low-yielders like the Swiss franc or yen. And that's predominantly because with what's going on with OAT spreads, with energy prices, et cetera, the expectation is that a lot of the funding that had been done for carry through those other low-yielders should actually rotate to the euro. So very, very downbeat on the euro.
And we have that, you know, we've been sort of talking about that against cyclical currencies like again, Aussie, Nokia, even Sterling that we've been more constructive on, but also versus the likes of yen and Swiss, which gives us some sort of risk hedges that we have increased in recent weeks. So as I stand back and I look at the events this week, you know, and I look at these three pillars, I don't really feel like we need to actually adjust them a lot. And we're actually still pretty much engaged on all three fronts.
Although with the caveat I said on the high-yielder side, which is what we need to sort of unpack a bit more. And we'll get to that in a second. But Pat, let me start with you first.
We've got the midterm elections in the U.S. next week. How are we thinking about the follow through to the dollar here? Yeah.
Thanks, Meera. So that's next week on Tuesday. Polling and betting markets have been increasingly bracing for a pretty strong Democratic outturn next week.
Big picture, though, you know, for me, I don't think this is necessarily like a huge event risk for our space, given from like a fundamental standpoint, you know, particularly since the presidency is not changing here. And that's how it's priced in the ball space, event risk for next week is actually very interestingly below what you see for upcoming NFP and CPI prints. So the market also quite sanguine around the event itself.
Again, fundamentally, you know, we've talked here in the past about what the relevant channels are for the dollar. And basically, that's fiscal policy, trade, AI, foreign policy and FX policy. But you know, we always flag that only a couple of these are actually sensitive or conditional on actual congressional outturns at the midterms next week.
Most obviously, that's fiscal policy, highly dependent on the composition of Congress going forward. But if, you know, if the Democrats basically perform in line with polls, then you do get that kind of gridlock scenario. The other two policy arenas that are live right now, I'd say, are foreign policy.
Certainly a lot of questions about the forward looking trajectory on Iran. But again, we highlight that the path forward on Iran is not really at all conditional on how Congress is composed going forward. So not really kind of a contingent on the election itself.
And we also don't think that, you know, AI policy at the federal level changes a whole lot in either scenario either. That all said, you know, there are a couple of reasons to think that potentially the dollar could be a little bit weaker if the Democrats do follow through on their strong polling numbers right now. First, historically, that is kind of the relationship when Democrats have strong outperformance and they net a lot of House seats, tends to be dollar flat to lower versus the inverse for Republicans when they outperform, gain a lot of House seats.
You tend to see the dollar rally in the trailing one month. And then second, I would flag that interestingly, you know, we measure various ways of looking at the dollar risk premium. So it's discount versus fair value, i.e. what part of dollar trading is not explained by fundamentals and fair value.
We've noticed that over the last few months, basically since kind of June, July, the dollar has actually had some decent correlation to metrics of Democrat momentum in the polls, be that, you know, basically they're betting odds for a sweep, or it could be a ratio, for example, of equity baskets linked to strong performance compared to as a ratio of, you know, the red wall. So Republicans doing well. So the dollar has actually had some correlation to those momentum metrics, which is interesting.
And so on the other hand, like I said, if the Republicans actually end up outperforming and say, manage to retain the Senate, which is not really the base case, according to the betting markets and polls right now, we would expect that, you know, the dollar could actually see a bit of a lift there, again, consistent with history where Republican outperformances tend to see dollar stronger in the trailing one month and also potentially linked to things like maybe AI policy, you know, giving a boost to U.S. equities here. And, you know, on that note as well, finally, we're also looking at kind of relative equity performance for the dollar over time. Historically, in the one to two years trailing midterms, U.S. equities kind of continue to outperform regardless of the outcome of the midterms.
And so long as that's the case, you know, that maps fairly cleanly into our dollar frameworks where traditionally a 5% U.S. equity outperformance is consistent with about 1% up in the dollar. So potentially a modestly weaker dollar if the Democrats perform strongly and sweep next week, but a chance that the dollar actually pops higher if the Republicans outperform next week. OK, thanks a lot for that rundown, Patrick.
I guess you also have other events going on next week. You've got payrolls and the Treasury funding, I think, which will be interesting, but also any takeaways from the FOMC? Yeah, so, you know, on the Fed, the way I framed it on the podcast a couple of weeks ago, I personally thought there were dollar positive risks heading into the into the event.
The way that Warsh kind of like characterized the Fed's stance against inflation at Jackson Hole. And then again, at the September FOMC, I thought we're quite hawkish in nature. And I thought, given the backdrop that Core CPI just printed a pretty firm 33 basis points last week and a three month, six month annualized measures of inflation generally are not showing kind of that downtrend that he stated he wants.
I thought, you know, we were opposed to see some pretty hawkish rhetoric. I thought the press conference probably fell short of that. There were maybe a couple of dovish notes in there.
So on the whole, you know, the dollar ended up selling off on the day. We also had the news that, you know, the meeting schedule is being tweaked in 2027 and 2028. Bigger picture, though, like I admit that there wasn't really enough there to obviously dent kind of like the forward path of rates for the dollar here too much.
December's still pretty priced around 20 basis points, I think, reflecting in part that, you know, the statement did add additional language, kind of like, you know, reaffirming the heightened bias there. We did have a couple of dissents as well. So for the time being, we think, you know, at least from kind of the Fed policy standpoint, relative rate differentials and things like that still remain reasonably favorable for the dollar.
So end of the day, not a game changer from the Fed for the dollar this week. And then, yeah, next week into payrolls, you know, I think the consensus is still kind of in that 50, 75 K range like we've been in recent months. Continuing claims continue to basically hover at the lows, suggesting that, you know, there could be a little bit of downside pressure on the unemployment rates.
If we get something like that, no reason to obviously rethink, you know, the December meeting pricing again, given the way that the Fed just incorporated the hiking bias into the statement. If we get a particularly weak number, then maybe, you know, maybe the market starts to think a little bit more critically about whether they will pull the trigger in December. But I'd say it'd have to be pretty soft.
And again, some of the alt measures of labor market momentum are still pretty solid here. So a reasonably balanced risk, I think, overall for the dollar here going into that event next week. OK, thanks.
And I guess the last thing is on the Treasury refunding. The only point to make is, you know, to keep an eye on what happens with the size of the long longer tenure option auctions, if anything at all. I think the baseline from our eight strategies is no change, but that has tended to be an issue and relevant for the dollar.
Beyond that, you know, my personal take on Roche, I think it was noncommittal. I wouldn't take too many dovish sort of takeaways, you know, from that presser. Take your point, it wasn't as outrightly hawkish as Jackson Hole, but then he doesn't want to give forward guidance ever.
So and we do have a lot more data between now and the December meeting. So I think for that reason, payrolls is quite important. If we do get a weaker number, then I think that could be an issue for the for the bullish dollar view.
So so I think something to keep an eye on for next week. But let's move to Anushka on EM, big moves in your market to elections with surprises. Brazil obviously the big mover, but stuff to talk about in Israel as well.
So Anushka, happy to sort of have you walk us through your view, but also not just on Brazil. But more broadly, more broadly, are there any high yielders left that are still thinking about an EM? Yes, it's it's been a difficult week for our asset costs.
The Brazil election is obviously enormously important considering this is a high yielding market with a very large GBI in weight. Now, we expected that on a Lula victory, dollar Brazil would go to around 550 level. And we as well as the market, we had quite a lot of discussions this week.
We're surprised that actually the price action was more contained than we expected. On the other hand, on the rate side, it was a even more difficult reaction to the outcome. On the ethics side, why was it less dramatic than we suspected?
Well, there are potentially a few explanations. We think that the bullish positioning was primarily in options, which might have smoothed the reaction to it. We also think in some cases, clients used the period between the two rounds to start hedging.
We perhaps didn't see it as much in our data, but we suspect it was for a part of the story. We also know local exporters started selling dollar Brazil on the spike. So that really helped.
And the final hypothesis, and I think that's really the most important one for looking ahead, is that we at this moment do not have a clear trigger. Why would the Brazilian local market have to sell off more? There are certainly issues.
Brazil is acknowledged to be a large and important issue for this market, but we do not have currently a trigger. Why would the fiscal issue have to play out right now? And if we do not have a trigger, it's very hard for EM investors to ignore this double digit carry market.
We know that if we don't have Brazil as a potential carry play for the GBIM, the alternatives are really not that many. Now in terms of what these triggers are, what we really have to watch in the near term, that's the appointments. We still do not have the name of the finance minister that is going to be watched very closely by the market.
It may be announced as late as December. We also have positions on the central bank that can be filled and can give us a signal of the intentions of the administration. Obviously, previously, there was worries about changing the inflation targets, a very important aspect to watch out for in those appointments.
My personal view is that without immediate triggers, it will be very hard for EM real money investors to disinvest. We are still getting inflows into the asset class despite the pressures globally. Unless the fiscal issues are being brought forward by some specific action, by some specific mistake, I think it will be very hard for EM investors to completely start disinvesting from the Brazilian market.
That's not necessarily a bullish story, but it's just saying that the bearish story might not hit us straight away. For the asset class, it's obviously a big, big question mark. We do not have many other alternatives in the higher yielders that can absorb that amount of GBI and weight.
INR, IDR, these are the Asia alternatives which are dealing with their own issues. We have Colombia, which we are very constructive on, but it is not a large market from a real money perspective. We think that there are some relative beneficiaries.
So the media bucket can actually absorb some rebalancing. We are generally constructive on kind of a few of the media where South Africa fundamentals are good, Mexico fundamentals on the rate side are good. So some of the media could start benefiting.
Now, that's the Brazilian election. We ourselves have become more neutral from previously and more hopeful, constructive. Now, in Israel, that's obviously much smaller markets, not with asset class implications.
So it's more the nitty gritty of this market, but certainly a market that we like covering. The surprise here is smaller in the sense that polls were telling us that we might end up in a deadlocked situation with no clear coalition emerging. That is what the polls were signaling and that's what we got.
The element of surprise was that polls were indicating that the opposition bloc would gain more than the Netanyahu bloc. That did not happen. But at this moment, we are in a deadlocked situation.
We do not really know how the coalition talks are going to play out. There is a substantial risk of early elections. Now, how does it matter for the FX market?
We have here an FX market that has high correlations to equity prices and equity prices are not doing particularly well. We have a market that has really lost carry. FX implied yields are as low as 1.8, 1.9.
And Bank of Israel does not want to encourage shackle strength. It would likely defend against shackle strength and further rate cuts. So the context here is that the market was hoping for the election to provide a positive trigger and we did not get that.
So for those clients that were looking for hedges for US equity markets, now without a clear outcome of the elections, perhaps those hedges just look a little bit more attractive for the market and the carry is really, really valuable. So I think the market was hoping for a positive trigger and the absence of a positive trigger is probably actually negative. Yeah, that's that's actually very interesting.
Just some some notable stats for people who are following the carry basket. It seems like the global vol adjusted carry basket has had pretty substantial drawdowns. Basically, the entire total return for the second half of this year has been wiped out now with these with these drawdowns.
So it's not really looking great at all. But year to date, still in the green, relatively healthy returns up there. If I look here to date, but obviously second half has been pretty rough.
In the end, no drawdowns in aggregate for the carry basket. We are flatlining. So so far, it seems like more of a sort of Brazil idiosyncratic rather than a broad based carry drawdown story.
But as I said, you know, to me, while Aussie and Naki still are pretty attractive on the high yield side, it does a lot of these choices and the returns are depending very much on what your choice of funders are. So your funding for now is really the way to go, in my mind. But with that, let's turn back to DiEM.
James, we have three central banks next week on the DiEM side in your space. We've got BOE, Norges and Riksbank. What are the outlooks there?
And then, of course, we have the much awaited UK budget. So any updates on sterling after that? Sure.
Yeah, thanks, Meera. I think Bank of England's most interesting for me. I think there's this hawkish risks.
You know, a rate hike is priced and expected. But I think you look at the data where it's tracking versus forecast. I mean, the labour market looks like it's turning a bit.
Unemployment rate down at 4.7. Bank of England is expecting it back above five next year. So their thesis around kind of labour market slack containing inflation is just kind of not holding up at the moment.
There probably needs to be some acknowledgement of that. So it could be the case that, you know, you get a hike and you get some kind of guidance that towards, you know, more coming, more needed in terms of tightening. And OK, the curve is reasonably well priced with, you know, around 100 basis points of hikes to the middle of next year.
But, you know, the sense is really that Bank of England have kind of lagged the pack in terms of any kind of synchronised global hiking cycle. And they've been reluctant to come to the table with tightening. And they've been kind of leaning on this slack in the labour market, which is now not there.
And also you've got inflation running at three and a half versus three and growth running above forecast as well. So, you know, all the data is really moving against them. And, you know, we're expecting a 7-2 vote.
But the suspicion is for Sterling, it's going to, there's probably going to be hawkish risks from the meeting overall. I think Scandi Central Bank is about keeping it quite brief. I think they're quite, you know, not as interesting from my perspective.
I mean, Nordjys Bank kind of made their shift with the rate path at the last meeting, you know, lengthening the duration of the high hold, which, you know, allowed Noki to benefit from a carrier perspective. And, you know, this meeting, you know, widely expected to keep rates on hold. The data isn't too far from forecast.
You know, you could argue really that they don't really need to do much. And Noki's paying kind of much more attention to terms of trade, you know, the carry profile that's already there and what's going on with the euro that Mira mentioned. Riksbank is expected to hike in price.
But ultimately, I mean, core inflation is still at 0.5. So, you know, they're going to have a hard time getting excited about a protracted hiking cycle. You know, so, OK, the curve is reasonably well priced.
As well. So this is going to be a Riksbank hike, but we find it hard to see a hawkish hike. And so, you know, stocky, I mean, we, you know, we do have a bit more of a constructive outlook here versus euro.
But we still see it lagging behind Noki and Yen and dollar. So I'll leave it there with the central banks. As far as the budget goes, I thought it was quite interesting.
I mean, no major surprises, 15 billion headroom, but they were really quite pessimistic on growth. So one quite interesting stat, I think, is that you're going to need a 5% annualised decline in Q4 GDP this year to deliver their growth forecast for this year. And some of that is a function of the cutoff point for the assumptions of when they estimated growth.
But even accounting for that, the forecasts are quite pessimistic. They downgraded 2027 to 1%. We've got 1.5 for next year.
So that's going to create a bit of a cushion for borrowing in terms of like if growth comes in stronger, then I think borrowing is projected to be kind of above 4% of GDP next year. Growth comes in stronger. There's going to be a cushion there.
That's a positive for sterling, I think, even though, you know, the overall budget delivery was pretty much on expectations in terms of like, OK, you've got a bank tax. It was a little bit less than expected. You've got a household energy payment that was 2.6 billion that introduced a little bit of funding uncertainty, but not really too much.
They still managed to keep the headroom at an optically kind of comfortable level. So, you know, I think overall, yes, it's the growth takeaway that's quite interesting for me from that. And then you have the Bank of England hawkish risk next week.
So for Eurosterling, you know, we've had this bearish bias for a while and I think fair value is around 84.50. We've been saying, you know, it's traded two pence cheaper previous times in the year where fiscal risk premiums relaxed. You've now got potentially rate spreads are looking a little bit more interesting.
So, you know, I think continued downward bias for Eurosterling is reasonable. Yeah, that's really been a great call. And then just to wrap up, since we've gone on a bit already, we also have the RBA next week, 25 basis points expected, very well priced, very well expected.
In my mind, this just sort of bolsters the case for Aussie at 4.85 percent yield, quite attractive in a world particularly where EM yields are compressing down to it as well and the EM high yielders, you know, due to at least some of them like we talked about for Brazil, there are some extra issues to deal with. So Aussie, Nokia, I think even globally are fairly competitive, I think at this point, given the compression we've seen on the EM side. So, you know, still fairly constructive in Aussie, particularly on the crosses.
And then finally, I think also worth mentioning, although we could have Benjamin on next week to discuss on Friday, but we do have the New Zealand elections coming up and they're the big issue is that if we do have some sort of Labour win, then what happens is that the prospect of the Reserve Bank of New Zealand returning to a dual mandate is is going to be very much on the table, could see basically initial sort of Kiwi weakness on the back of that and some rates receiving as well. But certainly, you know, that is going to be an important event to watch out for, particularly after the fact that the Reserve Bank actually skipped in a surprise move a hike this week. So, you know, certainly doesn't bolster the case for Kiwi, where it is among the lowest yielding currencies on the cyclical front with a pretty large current account deficit.
And also, you know, it doesn't really have the right terms of trade because because of what's going on with energy prices. So something to look out on, on the Antipodean side as well. We'll stop there and what was a fairly long podcast, but as you can see, there was a lot to unpack.
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 October 30th, 2026.
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