The desk anticipates a shift in the dollar's trajectory, driven by recent fluctuations in energy prices that disproportionately affect energy importers. Per the full note from J.P. Morgan, these developments suggest a heightened vulnerability for countries reliant on energy imports, which could lead to a weaker dollar outlook in the near term. The upcoming week is pivotal, with several major developed market central banks set to announce policy decisions that could further influence currency dynamics. This backdrop sets the stage for potential volatility in FX markets as traders position themselves ahead of these announcements.
What the desk is arguing
J.P. Morgan argues that recent developments in energy prices are reshaping the dollar outlook, with energy importers facing increased vulnerability. The podcast also sets the stage for a busy week of DM central bank decisions, recorded on March 13, 2026.
Where it sits in our coverage
Our internal coverage does not have specific data on the relevant currencies, but we note that energy price shocks typically weaken import-heavy economies. Consensus leans toward a softer dollar if energy prices remain elevated.
How other firms see it
goldman: expects USD strength on resilient US growth, energy price rise adds to inflation concerns.
morgan-stanley: sees near-term USD weakness as energy costs pressure US trade balance.
ubs: neutral dollar, with energy impact muted due to US shale output.
Key takeaways
01Energy price developments are a key driver for the dollar outlook.
02Energy importers are particularly vulnerable to dollar weakness.
03A heavy DM central bank week could amplify FX volatility.
Market implications
If energy prices continue to rise, the dollar may weaken against energy-exporting currencies like CAD, NOK, and strengthen against importers like JPY and EUR. Central bank decisions this week could either reinforce or offset this trend.
Risks to this view
A sharp reversal in energy prices or unexpected hawkishness from the Fed could strengthen the dollar. Conversely, a dovish Fed along with sustained high energy prices could accelerate dollar weakness.
Hello and welcome to J.P. Morgan's At Any Rate podcast, the FX edition. I'm Meera Chandan, co-head of FX Strategy at J.P.
Morgan, joined today by our global strategist Sarindam Sandilia, co-head of FX Strategy and focusing on Asia, calling from Singapore, Patrick Locke from the U.S., and then James Naligan here from London. So two topics we're going to talk about today. Look, we can't really not talk about Iran and the energy price shock and how that's changing the view and impacting it.
And then, of course, we have a whole swath of central bank meetings coming up on the DM side next week that we should discuss, although I'm not sure how much of a game changer they can be at this point in time. But just taking a step back on the Iran issues, I'd say the most important, you know, concern here for macro markets really should be the time. Time is of the essence.
The longer energy prices stay elevated, the longer the flow is restricted from Hormuz. You know, that's that's when you start to see sort of this growth story start to get more challenged. And really, a lot of other factors start to come into play.
And obviously, among the importers, it is the Euro bloc and Asia that are the most acutely impacted. The exporters, such as the dollar, for example, the U.S., Australia, Canada, Nokia, all of them are experiencing terms of trade boosts. And you can sort of see how FX markets are really getting informed by the energy price story.
And to me, the main concern now is, look, our bias has been bearish dollar bullish beta. That continues to be the medium term sort of orientation that we've been talking about. But the reality is the longer you spend in this environment, the harder that you get to hold on to.
And actually, you're almost forced in a way to reconsider what could happen in the alternative. And the alternative price action is is something that we're seeing unfold quite acutely. It's through the stagflationary lens.
Higher yields, not good for risk sentiment. And that's an environment, as we know from the past, where the dollar really stands out as a viable defensive place. So, you know, and the dollar bridge starts to come into come into play.
So the concern and the tradeoff here in our minds is, you know, with with the upfront caveat that we don't really have the visibility on how long things are going to last and how acute the supply shortage on energy is going to be. The concern here is that every passing few days, every passing week is just mounting to this, you know, in this direction. And I think some of the dollar's hedging properties start to come into play in a world where Gavi bonds are not really providing you that hedge and people are looking for some protection.
The dollar with its yield about 3 percent as an energy exporter and a sort of a safe haven currency in this particular environment starts to come into play. So in a way, you're almost sort of forced into having a bit more of open mindedness to having a more bullish view on the dollar. And I would say that this, you know, this is the direction we are indeed heading in.
As listeners of this call will know, we have been fairly downbeat and bearish on the dollar for the last year, actually. We were pretty quick to neutralize right in the aftermath of this attack unfolding. And now this week we are turning more bullish on the dollars and the currencies that, you know, that we are, I think, more downbeat on are really the importing currencies, which would be things like the euro block, which includes, of course, sterling, euro, Sweden and the Kiwi dollar as well.
And so, you know, I should just emphasize that this is a tactical change in view. I mean, obviously, the situation is very fluid and hence a tactical approach is really the most prudent one and the most necessary one here. But certainly we see some dollar upside risks coming into play from this.
So that's sort of up front to set the stage here. We do have the central bank meetings next week. And I think the ECB is an interesting one because if you look at the market pricing for the ECB, we've got almost 50 basis points of hikes now priced in for the next year, which is quite aggressive.
And, you know, in a world where ECB, the region is an energy importer, this is going to be a hit to the growth side of the story as well. So ECB hikes actually, I would argue, should be, you know, if they are delivered, which, you know, I'm personally skeptical about as well, but in the event they are delivered, would actually be even more growth negative over and above the energy price shock. So shouldn't really be viewed as a source of support for the euro.
My bias here is that, you know, of course, we'll be watching the ECB to see, you know, what their initial reactions are and how they are responding to the energy price increase. But at the same time, you know, it would be a red herring if they send out a hawkish message. It shouldn't really be viewed as a bullish outcome for the currency.
And in fact, I would argue it should be even more bearish because it really challenges the growth story. So that's the main thing on my mind. I do think that the two hikes are overly aggressive, but, you know, there are positioning issues in the rates market itself, which makes that sort of really hard to interpret at this point.
But let me stop there and let's, you know, since we're on the European sort of train, so to speak, let's, James, maybe we can start with you. What are your main observations for markets more broadly and how are you thinking about the specific currencies in your space? Sure.
Yeah. I think there's probably still a decent portion of the market that are, you know, thinking about the possibility of a de-escalation. But I think there's also a portion of the market that think that there is some edge to be had in the geopolitics in terms of when we're now coming into a situation where it's clear that the commentary from both sides have potentially dug themselves into a conflict that could last longer, which to your point, Mira, starts to become a problem for the cyclical picture.
And I think there are parts of the market that are just not pricing that correctly. You know, I think that the G10 reaction in FX has been very Euro focused with, you know, also some energy exporter, importer RV. But I think there are some importers that haven't weakened as much as they should do, namely Sterling and Stocky.
And so that, you know, that's where I'd be focused in my space in terms of a repricing of the cyclical picture. You know, we have been tactically bullish Sterling since the budget last year on a kind of a post-budget rebound in sentiment. And this week, we are actually turning bearish on the combination of a new energy shock, but also the upcoming political risk for Sterling.
And similarly to, as you said, Mira, you know, on a hawkish shift from the Bank of England, which is not what we're not expecting that next week, but this is not healthy carry that's being, you know, assigned to Sterling here. It's something that brings us back to the stagflationary reaction function for the currency. And on top of that, you have the local elections coming up in May.
So, you know, I think you can look at Sterling in a variety of different ways in terms of, you know, returns versus energy dependence, how well the surveys have done versus energy dependence. And Sterling does screen to us as a bit of an outlier here. Some of it might have been driven by positioning on wines, but we do see that as an opportunity to turn more bearish here.
Stocky has really been the poster child for the global growth recovery over the past, you know, four or five months. And if you were to tell me that, you know, Euro Stocky is only up half a percent since the Iran issue came on the table, given the potential ramifications of a closed straight of all moves for a prolonged period of time, that looks incorrect to us. And we were on this podcast last week talking about the potential asymmetries in Stocky in the Swedish krona with regards to, you know, the upcoming dividend season, the weak data in Sweden.
So even on a de-escalation, you still have some bearish Stocky drivers to think about. So Stocky continues to look quite asymmetric to us. I'll leave it there.
Thanks, James. And, you know, we have quite a few central bank meetings next week. We've got the BOE, the Riksbank, the S&B.
Could we learn anything from those meetings that informs or even impacts what the price action is going to be? Yeah, I mean, my feel on these central bank meetings is that they're going to try to buy some time and that we're not going to learn a whole lot because this conflict is still, you know, in its kind of early stages. I'd say probably the one that matters a bit more to my view is the S&B, just because, you know, we saw some verbal intervention last week.
Since then, they've been quite quiet that that might well be because they're in a kind of semi blackout period. But this goes back, you know, to well before Iran that, you know, Schlegel does seem to be taking a bit more of a hands-off approach to the currency. And I think the market has started to get quite, you know, wise to that.
And if we don't see a kind of real significant material shift on the language on the currency next week from the S&B, then it's just kind of inviting the market to punish the central bank a bit more in terms of currency strength. So, you know, I have a suspicion that the S&B won't change the language on the currency too aggressively next week. And so we're actually turning neutral on the Swiss franc this week.
Our view had been that you could see some underperformance versus the high beta currencies as growth recovered globally. And we have actually, we did actually see that recovery, you know, prior to the Iran issue. But what we haven't seen is those safe haven outflows from the Swiss franc to, you know, say European assets or etc.
And that's been a concern from us that we've noted over the past few weeks. And I think the S&B could be a bit of a nail in the coffin in terms of, you know, if you have that combination of a central bank that's a bit more hands-off, plus the outflows not occurring and this Iran issue, then, you know, I think, you know, we'd be shifting more to a stance of maybe trying to fade sell-offs in the Swiss franc. For the Bank of England, you know, I think that there's a lot of uncertainty there.
They were, you know, looking to cut potentially. I think that's, you know, now quite clearly off the table. It's hard for them to shift hawkish.
You know, as I say, the risk is quite still quite early stage. You know, I wouldn't be surprised if we get a 9-0 vote for unchanged given the uncertainty, but we're thinking base case 7-2. And Sterling is going to gear itself off of what the reaction function is around inflation and the pass-through of the energy shock.
But I think bigger picture, you know, Sterling is probably going to be taking its cue more from the geopolitical headlines and the repricing of broader growth rather than what the Bank of England say next week, because they're likely more to just kind of try and buy time. They'll probably neutralize the guidance in terms of the easing bias and say, you know, the outlook depends a lot more on inflation in terms of the geopolitics going forward. For Riksbank, it's kind of similar.
You know, it's the balance between the softer domestic data and the upside risk from the geopolitical-driven inflation. But again, Stocky probably more likely to take its cue from the broader macro rather than the meeting itself. They have obviously been pushing back on the currency, on currency strength, but I think with the currency now actually weakening and, you know, there's clear new risks there, they might actually possibly push back a bit less on the currency than they did in the last set of minutes.
So, you know, but I don't think the market would be surprised to see that. Thanks a lot, James. We also have the RBA next week, which, you know, Ben Jarman is not on the on the call today.
You know, his view is that the meeting is a tight call there. You know, as far as the markets are concerned, a 70 percent chance of a hike is already well priced in. That was following the deputy governor comments that we got on Tuesday.
So, the meeting itself has gotten pretty well priced and, you know, our own view here is that they actually end up staying on hold. I think aside from some volatility on the day in either outcome, you know, aside from the volatility that Aussie could experience on the day, I don't really think the broad outlook for the currency actually changes. It is still going to be the high yielder in DM.
It's, as we've been pointing out, at an inflection point is the first time in a decade it yields more than the dollar. The challenging, the more challenging issue for Aussie is, given that positioning is likely crowded, in case these energy price shocks do continue to persist and that takes a toll on risk sentiment, can Aussie maintain its outperformance given its high beta status? Historically, we have seen that in such environments, the crosses, Aussie longs on crosses tend to work better.
So, the theme that we've been focused on really is things like Euro-Aussie lower, which we've been very much focused on since mid-January. And I think that continues to be the case going forward as well. It gives you the right way exposure on the relative central bank stance.
It gives you the right way exposure on energy prices. And then there's just a balancing act versus what happens to the high beta complex. But beyond the RBA, we also have the BOJ next week.
Aninda, maybe you can talk about that a bit because I think dollar-yen at this level is starting to become interesting, potentially even on Intervention Watch. I don't know. So, any comments on that would be quite useful.
And then what about Asian currencies more broadly? Because on the list of importers, Asia is pretty high up on the list. I know empirically, the Euroblock is the one that's the most sensitive to rising energy prices.
But certainly, Asia has got to be feeling the pain here. Amina, yes. So, let's take those in turn.
BOJ next week is unlikely to be a huge market event. Not a huge amount is priced in any ways. BOJ is going to follow the, I guess, first principle of central banking, which is if faced with uncertainty, go slow.
So, the language by our economists is likely to sound something like maintains its normalization path, but is assessing uncertainties related to the Iran war. The tricky piece for the BOJ, though, is that I think central banks differ in the amount of luxury or headroom they have in terms of standing still and looking through the kind of adverse supply shocks that we are seeing right now. And I think most people would credibly argue that BOJ is not one of the central banks that has that kind of space simply because for a long period of time, we and many investors have been of the view that BOJ is behind the eight ball in terms of normalization.
And the longer the central bank waits, the more of an impact it has on the yen. And then it becomes a circular problem of it having to respond to the weakness in the currency rather than the central bank action itself driving the effects, which is probably why we have seen, despite the overarching concerns around the threat to the cycle from events in the Middle East, yen hasn't really reprised its traditional role as a haven currency. This week, dollar yen pushed higher, as you said, towards that old intervention threshold around 1.60.
And when I probe our yen strategies in Tokyo, they don't really think that this is going to be the occasion when Japanese authorities come out in force and try to intervene, given that the drivers of dollar yen in this mini cycle have been global rather than Japan specific. But in the end of it, it all leaves me with this sort of curious observation that central banks slow down in times of uncertainty because they do not want to unduly tighten financial conditions and precipitate a deeper growth downturn than they would like. But you are going to get this combination of events in Japan where global forces are pushing equities lower.
The BOJ is going slow, which is not doing the long end of the JGB curve any favors, and it's not doing the yen any favors either. So you have a trifecta of asset classes that are potentially within the central bank's ambit of influence that are all sort of weakening simultaneously. And this is just not a good look right at this point in time for investments in Japan.
Switching to the Asia side of the story, 100 percent. I think we in Asia are feeling the pain, reading headlines that indicate this is not just financial market pain, but real economy pain coming to the fore. The way investors are starting to think about this current shock, we don't know how long it's going to last, as you said, at the outset, but it feels like a weighted average of the COVID shock and the 2022 Ukraine war shock.
It feels like the COVID shock because of the headlines that we have started to get, which is cutting down on work week, cutting down on government employees coming into work all in a bid to save electricity, weddings getting cancelled, restaurants shutting down, sort of very reminiscent of the kind of economy wide closures we got in 2020. But at the same time, you're also getting this combination of weaker growth, but central banks unable to cut because of a potential surge in inflation, which is very 2022 like. So that combination cannot be good for asset prices in general.
It is particularly punitive for asset prices in Asia, which, as you said, are frontally exposed as a big importing block to this shock in energy prices. But what we observe on the FX side is that some of the worst exposed currencies in the region, which traditionally have been in the high yielding South Asian importing block, India, Indonesia, Philippines, particularly Indian Philippines, they've reacted, but they're probably not reacted to the extent that you might have felt. So sort of echoes of what James was saying earlier about the non-euro block of European currencies.
Some of it is by design because central banks have been active in trying to blunt the effect of this macro shock on the FX. Some of it is because, you know, we aren't yet yet being the operative world in a phase where the Fed is hiking rates. That was the big difference in 2022.
So central banks, having just finished cutting cycles in most of the region, they are waiting and watching and not yet pivoting to growth period of rate hikes like they did in 2022. I think those may have shielded some of the importers. But in terms of the cross section of currency reactions, you know, we are seeing a relatively clean divide, as we have seen in the GTM block between the importer versus exporters and not really very many exporters in the region.
Malaysia is the only net energy balance positive currency in this part of the world, and it's relatively outperformed the importers both in the north and the south. The last thing I'll say is that China should not be immune to any of this because it's a huge energy importer. But it's also the classic example of how terms of trade doesn't always neatly map onto FX because there are muddying influences from policy.
So first of all, China has bigger reserves by SPR of both oil as well as alternatives compared to other parts of Asia. So the switching costs are smaller. And also the FX itself, the reaction is blunted by much heavier sort of currency management by the PDOC.
We should also not forget that amongst this war, there is still the ongoing issue of President Trump coming to China at some point in late March, early April. So the stories we are telling around the geopolitical optical imperative for China to keep fixings on the steady downtrend and for CNY to remain well behaved are still very much in place, which is why we feel like one of the relative winners in Asia of what's going on in the Middle East is possibly the China basket. We think that being bullish China against some mix of dollars and euros, which neutralizes the beta to broader FX risk, is actually not a bad way of going about things.
Yeah, let me stop there. Yeah, understood. It's kind of interesting that if I look at currencies like India, they really haven't weakened in tandem with sort of the terms of trade shock that you're seeing in comparison to currencies like half, right, or some of these currencies in the euro block space and the India space, even stocky for that matter.
So definitely an interesting observation there. OK, Patrick, last but not least, let's talk about the central banks and any other observations you have. I guess there's FOMC and the BOC next week.
Yeah, that's right. Look, I think the outcome of the March FOMC has kind of been pretty clear for a while since the rhetorical pivot by the Fed between December and January. So we're not expecting anything on the rates, but it is an SEP meeting.
So we will get kind of revised economic forecasts as well as, you know, the dots. So I'll probably be a little bit more interesting, you know, kind of like what's happened in the interim. I think it makes sense to maybe see some upward revisions to inflation.
Not exactly kind of clear what's going to happen in growth, but I think it's still reasonable to maybe see one cut still in the dots, but probably a risk towards none. Certainly that was kind of like that would be consistent with what we saw in the minutes released in January, where much more of the committee is now less amenable to potentially cutting more this year. So we'll be kind of watching for that.
But I think generally speaking, that's probably going to play it down kind of a fair way because of just all the various uncertainties and, you know, weighing the upside risk to inflation against, you know, like the payrolls release that we got last week, which was negative private payrolls growth running like 25 to 50 basis points and kind of like 17,000 on a kind of a three-month rolling average. It's not a lot there to like, you know, obviously kind of clearly direct the Fed one way or another that should obviously really move the dollar here. So that's kind of how I'm thinking about that.
And then, you know, on the Canada side, I also don't think the BOC is going to be a real mover there. You know, we pushed back in December when the market got real excited about BOC rate cuts on the back of some stronger data. Rate pricing basically came back all the way to us after that.
The BOC did not lean into any of the stronger data. And subsequently it has weakened and literally on this call while we've been recording Canada just printed a minus 83,000 payrolls print. So definitely still some questions there about kind of the cyclical backdrop.
BOC has been kind of like really, you know, talking about uncertainty a lot just in general because of trade and USMCA renegotiations. You layer in kind of the Iran stuff as well. I really don't think there's enough there for them to kind of commit to one side here to move for CAD.
So I think the BOC should be kind of a relatively straightforward event for CAD as well. Okay. Thanks a lot, Patrick.
And thanks for keeping that short. I think we're on time now. Thanks everybody for joining.
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