The desk anticipates subdued FX volatility extending into 2026, driven by resilient US economic growth and a lack of significant central bank activity. Per the full note from J.P. Morgan, the current low levels of volatility may limit further downside, but upcoming policy events in Q1 2026 could challenge this stability. The desk highlights the attractiveness of cheap forward volatility as a hedge during this period, while also recommending a focus on European growth and Antipodean currencies. This perspective aligns with our consensus view, which targets a EUR/USD level of 1.075, within a range of 1.04 to 1.12.
What the desk is arguing
J.P. Morgan argues that FX volatility will remain low into 2026, supported by resilient US growth and low central bank activity, but starting levels cap further downside. They highlight that policy events in 1Q26 could disrupt this calm, making cheap forward vols over that period attractive as portfolio hedges.
Where it sits in our coverage
No internal coverage data available on relevant currencies. The desk's view aligns with a consensus that near-term vol compression is extended, but idiosyncratic risks in early 2026 warrant protection.
How other firms see it
No specific firm stances provided in the source.
Key takeaways
01FX vol subdued into 2026 on resilient US growth and low central bank action.
02Limited further downside from current vol levels; 1Q26 policy events could test the regime.
03Recommend buying cheap forward vols over 1Q26 as portfolio hedges.
Market implications
Expect continued low FX volatility in the near term, but potential for spikes in early 2026 around policy events. Investors may seek tail risk protection via options, supporting vol premiums for 1Q26.
Risks to this view
Resilient US growth persists, delaying policy shifts and keeping vol low. Conversely, a sudden policy surprise or macro shock could trigger a vol spike beyond current pricing.
Hello and welcome to this at any rate podcast, I am a random Sunday there from JP Morgan's FX strategy team. This is part two of our two year, two part year and special podcast series part one was a macro part two is focused on derivatives. I'm joined today by the entire derivatives crew on the team, Ladislav Yankovic, Juan Duranvara and Sanjana Shinde.
Now from an FX world perspective, you have to say that 1H25 was very eventful to say the least. You know, the Trump consensus of a stronger dollar was wrong footed pretty early on in the year. And then things came to a head with this big market crash involved spike after liberation day.
But it was almost a year of two hops from that point on, because since then vol and risk premium have been on a steady compressing path. So Ladislav, maybe turning to you first on the broad vol view, it looks like we find ourselves at this juncture almost every year that we sit down to write in your head outlook. VXY is on a seven handle currently.
Amira and the rest of the macro crew discussed a fairly denying outlook on carry fairly risk on climate for the first half of the year. Does that, in your mind, straightforwardly lead to a subdued vol view for the next year as well? You know, what are you thinking?
Any vol figures that market should be on the lookout for? Yeah, so as you're pointing out, it's pretty interesting backdrop for the for the FX vols. I do think that we should see FX vols pretty contained.
We're watching a couple of things like US growth, as you pointed out, the slow grind lower in the dollar that comes from our macro team, both of these are actually pointing out that somewhat contained FX vols in 2026. Now these are not really the only factors. Another thing that we are really watching closely is the single back activity.
And that's expected to be on pretty low side in 2026. In fact, when we looked at the some of the historicals, like 25 year historicals comparing the central bank activity, be it cutting or hiking, and we looked how it compares with the FX vols, we see that it mostly matters in the in the tails, basically the edges. So if activity is low, that tends to kind of pull vols a little bit lower.
If activity is high, like we had for a couple of years, it's been kind of pushing vols a little bit higher. And when we slice that into 10 buckets, we see that next year could actually fall something like second lowest bucket on the central bank activity. So it could be like fairly, like really keeping the vols at least contained, if not really pulling them down.
Now, as you put it out, really, the starting point is a little bit of a concern with global vol really on the low handle, like seven, which is like two points lower than we had it last year. And it's been going down since pretty much liberation day. So we're now like close to the five year low on this global index, which we are watching.
So definitely posing a little bit of a high hurdle for further decline in the FX vols. But really, the bottom line for me is we do think that on this pro-cyclical environment, we should see FX vols subdued, maybe not really lower or at least not materially. And we're also watching some of the tails, like US job backdrop and Fed independence are really two tails, which are kind of interesting to watch, at least near term.
But perhaps enough of this wide brushstrokes. I think we looked into quite a few interesting specific themes, like the basement, global growth, dollar rebound. How are you thinking about those and how to position for those things?
Yeah, so I think the details of all of those are in our Year Ahead Outlook note. I'll just touch on two or three. So first, we are, as a team, leaning into the solid European growth theme for next year.
Less so on Euro-USD, perhaps that is subject to greater cross-currents, more so on the intra-European crosses. So we are flagging bearish Euro-Poland option structures as being quite attractively priced. Our EM macro-analysts also have turned bullish on those lotting into 2026.
We also quite like the look of bearish views on Swiss crosses within Europe, such as Swiss-Norway and Swiss-Sweden. When we look at the pricing of option implied correlations in these crosses, they are not yet set up for the kind of divergence between Swiss and the Scandis that our directional analysts kind of expect next year. Second theme, we quite like antipodean effects, especially the Aussie, where the RBA is probably in the running to be the first among the DM central banks to start hiking rates at some point.
It may not be 2026, it may be only 2027, but markets will certainly start to move in that direction in 2026 at some point. We quite like bullish Aussie-Swiss option structures for an extension of Aussie dollar strength. There is also good value, I think, in betting on relative value within the commodity block, for instance, saying that Aussie and CAD are totally different currencies, i.e., they can diverge and Aussie-CAD can push higher.
Third, yen is a big theme for us in 2026. A big part of the macro-podcast that we recorded before this was devoted to discussing the yen view. So, we'll avoid rehashing that whole discussion, but in short, we are bearish and we think that cross-yen could have some decent upside next year in a carry-friendly environment.
And in options space, Brazilian top-side structures are pretty well priced to benefit from such a trend. And then finally, you mentioned debasement, and it was the theme this year, which is why gold has done what it has done. Commodity analysts are expecting gold to end the year well north of 5,326.
And yet, you contrast that with other reserve currencies that we have in fiat space that we cover, like yen, the Fed, much more poorly. And even the Swiss franc has been a haven of relative stability this year, is expected to join the club of weak currencies next year. So, option markets are not priced for this.
They're not priced for gold to be higher and for other fiat currencies like yen and Swiss to be competitively weaker. But I think playing on that divergence has value in options. But turning to you now, Juan, you've looked at carry, and especially carry as expressed by options quite closely over the years, we are going to encounter presumably a contained level of vol as large laid out, so that should bode well for carry trades, one of the best kind of option trades to position for that.
And also, you know, one question that periodically keeps coming up is whether the environment you're going to go into is going to be a dollar-centric one, or is it going to be more where crosses can have greater play? What do you think about the state of play on dollar correlations as a block? Yes.
So, as we look into 2026, and as you mentioned, the FX vol remains notably subdued. This environment, while ultimately limiting the upside for vol selling strategies, does create a favorable backdrop for harvesting linear carry via options, especially in the high carry-to-vol environment that we're seeing at the moment. In fact, carry-to-vol ratios have rebounded, are now above the 65 percentile post-GFC, which historically aligns with strong performance for option-based linear carry trades.
Our analysis highlights Euro-Poland, Euro-TROI, Turkish Lira, and CNH-INR as the most compelling crosses for quality carry strategies. These pairs stand out not just from their attractive carry-to-vol ratios, but also for their low stress levels, clean positioning, and supportive macroeconomic outload. In the outlook, we go over the best structures for optimizing carry-harvesting trades in these crosses, while minimizing the ployed capital and making good use of favorable features such as skew premium.
Turning to the correlations question you posed, dollar correlations have remained persistently elevated over the past five years or more, and we expect this trend to continue in 2026, with implied values in the 65 to 60 point range and realized values slightly higher. This outlook is supported by our macro forecast, which shows that most G10 currencies will be appreciated against the dollar in 2026. In contrast, we have various cross correlations, especially those involving sterling and euros pivot currencies, which present an opportunity for investors.
For sterling, the average realized correlation is severely underperforming, while implied are historically at a high level. Further, our macro analysts are increasingly bullish on sterling. For example, one possibility and one place where we see divergence is in dollar stocky via sterling, which is a correlation that is particularly elevated with a significant gap between implied and realized correlations, suggesting a bearish outlook on the correlation premium.
In summary, the environment supports a bullish stance on dollar correlations and a bearish stance on cross correlation, particularly in sterling and euro. Lads, can you also discuss what's your expectation for SKU next year and anything specific that you're watching in the cross asset space? Yeah, sure.
Really, just kind of continuing in the direction that you've been pointing out with the carry and how it may be still a pretty good year for collecting some carry. On the SKU side, and I'll start first with the SKU. So earlier it was mentioned, I think I already mentioned about global and EU growth and for the 2026 is potentially helping with some of the FX expressions.
So it does seem that the EU growth is quite a bit older reflected in the euro risk reversal. So what we like to watch there is risk reversal versus the money wall ratio is really one measure for where the risk reversal are. And those seem to be near the cycle high.
On the other hand, when we look at the euro SKU, it seems to be broadly underperforming. So that's in a way like really setting the ground for a potentially interesting year on 2026 for euro SKU harvesting. So essentially, people will probably then be bearish at top side walls through like delta hedge structures, pretty much try to tap into that underperforming SKU.
And it is pretty broad based that at least what we're seeing in our charts. But Euro Latam is one place that we are watching pretty closely. So basically, Euro Brazil, Euro Max, both of these, we see SKU underperformance on the order of like more than 50 points.
Definitely something that we will be watching for this euro SKU harvesting type of thing. Dollar EM SKU, it's actually on the opposite side. It's very downbeat.
On the other hand, it's pretty hard to be long dollar SKU outright. So again, being bearish downside walls, effectively, that's a long dollar SKU type of expressions. And in that space, dollar CNH could be pretty interesting.
Our macro analysts, they do see some downside in dollar CNH, somewhat contained. On the other hand, the SKU is not just downbeat, but currently beat for CNH. So does seem like that could be pretty interesting area within the dollar EM SKU worth watching in 2026.
Turning to the cross asset and hybrids a little bit, I think we're in the mode of the kind of a little bit tapped into the debasement and simultaneous bullish gold and bullish dollar yen and perhaps dollar Swissy. So those really open the path for the high leverage correlation expressions. But that's really not the only place.
FX equities are another pretty interesting spot, considering what the expectations are on the macro FX side. So for example, Sterling, I think it was already mentioned bullish stance on the Sterling. So basically through Q1, potentially even extended to Q2.
And then Swissy a little bit on the back foot, like being maybe a founder for the European growth. So Euro Swissy, again, upside in the first half. So these two things actually can help with this kind of shifting expectations around FX of 2026 could really help us with having some alignment with the upside equities also.
And again, that could lead to high leverage correlation expressions this time between FX and equities. So in my view, SKU and hybrids could be actually pretty interesting space next year. We'll see exactly how the things and what kind of pace we see, but definitely really leave some room for some good option type of expressions.
Shifting gears a little bit, I mean, so far, we kind of discussed quite a bit of these benign type of things. 2026 does seem to be pretty busy year with the elections. Sanjana, where do we stand on that? And also just more broadly, like what would you suggest for positioning, perhaps defensively?
Hi, Vlad. Yeah. Thanks for that.
So shifting gears to next year's elections, markets are closely watching EM, but not so much the U.S. midterms. So on the U.S. midterm elections, historically, these midterms don't tend to generate volatility. And for now, euro and yen vols are mirroring prior cycles, which means nominal pricing with the euro dollar around eight vols and dollar yen at 11.
Now, there is no specific election event risk priced in either yet, and so we are only expecting a potential modest uptick in vols around four to five to match what we have seen in previous midterm cycles, and that would also be much closer to the actual event date. If we do get such an uptick, that would price the midterm right in your usual payroll levels, essentially marking it a non-event. And by comparison, presidential elections tend to bake in around 17 vols of election premium.
Now, next is Hungary's parliamentary elections in April. So a quick rundown there. The TISA party is mounting serious competition against the incumbent, making it a close contest, which is pushing event risk pricing to 60 vols, which is around 3.5 times the highest historic levels from recent election cycles.
The 60 vols corresponds to 2.5% in break-evens. And so how does that essentially compare to our EM analyst expectations for a 4% spot move? So 2.5% is 60% of 4%, which is exactly how the FXO markets tend to price, which means that the FXO markets are also fully priced as it gets.
This leaves little room for further upside and quite a bit of downside in election vol pricing if the opinion polls do shift to one specific side. And last but not least, we also have Brazil's elections coming up in October. Now these are already seeing elevated vol pricing at 90 vols, which is well above historical norms this far ahead and on par with the peak pricing for the average of the last two cycles.
So we're going to leave at most 15 vols of headroom. Brazil elections do deliver big moves on the order of 40 to 50 vols, so the current pricing still looks a bit overdone, especially this far out. Now there's no guarantee, but historically there does tend to be a dip in pricing about 3 to 4 months out to election day, so if the pricing drops to 70, then that would be a good opportunity to buy the vol dip in the summer of 26.
Now answering your second question, lad, and as already discussed, we are largely positioned for 2026 to collect carry and premium during this pro-cyclical tilt. Speaking from a more defensive angle, to hedge some of that pro-risk exposure, we looked into a model-based vol selection that would position us into hedges that perform during vol episodes, but they don't also cost an arm and leg during quiet periods, which is always a challenge. Market signals such as carry vol, realized versus implied, help with the selection, and currently they are favoring Aussie, which aligns and does sound pretty reasonable to us since pricing is favorable and Aussie vol tends to react to broader vol shocks.
Yen vol is also another one that was screening favorably, but based on current backdrop, the Yen is a bit more complicated. And last selection from the model was the post-selection Huff vols on the EM side that look pretty interesting. Back to you, lad.
Yeah, so this concludes our discussion for FX volatility in 2026, I would like to thank the team for sharing their thoughts and their views for the next year, and thank you for listening and we hope that you find our analysis and our highlights useful. This communication is provided for information purposes only. Please refer to the JPMorgan Research Reports related to its content for more information including important disclosures. 2025 JPMorgan Chase & Company All Rights Reserved.