Global FX: Bearish EUR factors intensify, USD decouples from real rates, and an update on low FX vols

(upbeat music) Hello and welcome to this week's at any rate podcast. My name is Pat Locke, joining me today this week are the co-heads of FX Strategy. We are Chandon on London, we're in San Delia out of Singapore, and also our senior ballstrat, lettuce-law, Yankevic, joining me from New York. Look, reasonably important week. Another week, obviously of optimism on the Iran front, but it looks like there is some material progress towards at least some memory and a random understanding here. The dollar sold off as one would have expected, and as we have been expecting, but and obviously it hasn't been completed yet, but it does strike me that the dollar move was reasonably modest. I think that is consistent with our bias that things have improved on the dollar front in general. We turned more obviously constructive a couple weeks ago, particularly by a Euro dollar and dollar CAD. We'll talk more about that this week. But certainly the dollar sell off didn't look altogether particularly remarkable. I think that's encouraging from the more constructive dollar side of things. There were some other kind of local market moving events this week. Seems like most notably, RBNZ was a little bit more hawkish and expected. We've brought forward our expectations for hikes. We're still looking for 100 basis points, but now starting in July, Kiwi has outperformed on the week on the back of that. Looking forward though, part of the reason we've become more constructive on the dollar is this renewed low level Nassend US exceptionalism is how I might describe it. That will run into another test next week around payrolls following this week's maybe a little bit softer than expected suite of PCE data. But we've noted for a while that generally the dollar has tracked indicators of labor market momentum here in the US. So a third consecutive B to versus expectations next week I think would be material and would give this kind of US exceptionalism idea a shot in the arm to continue into the summer. So that will be kind of like the feature for us next week. And that's especially the case given that obviously the Fed is turning increasingly hawkish when you look across different metrics of Fed speak and the June FOMC obviously looms large with Kevin Warsh sitting for his first meeting as chair. More broadly, at this point I'd say it's a little bit surprising that the dollar is not yet stronger at this juncture. Maybe it has to do with questions about the Fed and that. But something we explore this week in our publication is that the dollar is looking about maybe 2% cheap to the recent move up in real yields in the US. A bit of a conundrum there, but maybe to help unpack that. And talking about why we think the Euro dollar is still projected to go down. Maybe Merrill, I'll bring you in. You're increasingly convicted on Euro dollar down. It sounds like you've been describing it more as kind of entrenched forward looking weakness for the Euro. So what are you seeing on your side? And where do you think you're going from here? Sure. Thanks, Patrick. And like how you set this up, I mean, it is looking like shades of your exceptionalism are coming back. And as you noted, we have become, I think, at least in sentiment and even in terms of how we expressing things a lot more constructive on the dollar. I think the Euro dollar, the pair, and from the Euro PN side of the equation, quite a few things stand out. I mean, if you look at the PMIs, for example, last week, we saw pretty big divergence between Europe and the US. The European numbers are showing some stagnationary pressure. So it's like output measures down, price measures up. Our economic activity, surprising disease have been negative for two and a half months, while the US is more in the neutral to maybe slightly positive. And so if you look at the, if you take a step back and you say, okay, fine, what's actually happened to the European growth outlook, our economists have actually marked out the growth outlook for the seventh consecutive time in the last three months for the Euro zone. So that's, I think that's a pretty big turnaround from where we were for most of the year prior to that after the German fiscal announcement. And I do think that the weakness is getting more entrenched. And of course, my expectation had been if we get a resolution on Iran, US, your dollar can be a couple percent higher on that. And then we'd want to fade it. But given the sweetness, I do wonder if you're even going to get that pop. The other thing is you said is that the relative real rate pricing has moved in favor of the dollar real rates in the US have gone up versus Europe. So if I look at a short term fair value models, the number that it was putting on your dollar fair value was between 106 to 114 in the middle of the week, that's gone up to 108 to 114. But I think regardless of the measures you're looking at and the horizon you're looking at, we're basically fair value on a short term basis for your dollar is below a current spot is. So, to me, from a macro perspective, it just doesn't compute that your dollar hasn't really broken out of its chance, fair range. Even though you've seen a 40, 45% increase in Brent and gas prices, you've seen pretty substantive, there's almost 50 basis point sort of narrowing in the real differentials between Europe and the US. So I do think more needs to be priced in, but to your point, there are probably reasons why investors want to keep positioning right and light. And we're going into pretty active, sort of almost binary events with the payrolls and the first watch meeting as well in the coming weeks. So maybe that has something to do with it. But underlying dynamics are certainly turning quite a bit more batterish on the other dollar. - Yeah, thanks, Mira. I continue to look back to the French PMI's last week, which were just terrible. And that was going to confirm today in the first quarter GDP print for France, which contracted not unexpectedly. And similarly, on the real right side, I have dollar CAD pegged up around 141, 141, 50. So definitely think there's room for this dollar move to extend on that basis. Thanks for that. I'm coming over to you, In Asia, a question that I get frequently on the Asia side lately is just how to explain what's going on in dollar Korea. I think a lot of people have been very constructive on Korea's prospects, but kind of long and wrong. So how are you thinking about that? And then against that backdrop, on the back of the dollar sale off yesterday, we had a new low in the dollar CNY fix. What are you seeing? What's the latest on CNY? Especially give them kind of the view on what we're looking for in your dollar. Hi, Pat. So it's a bit of a mixed bag in North Asia, say, dollar Korea is lower than what it was at this time last week. But rallies in the warm, just more sustained against the backdrop of another 8% drop week in the cost being a just another regular week for Korean stocks. And all the news this week was that South Korea's NPS, the National Pension Service, has raised its N26 domestic stock allocation target to 20.8% used to be 14.9. So what that means is it implies less need for the NPS to sell domestic stocks for re-balancing purposes, just because of price rallies alone. So this is a dynamic. I think there is at the heart of what we're seeing in terms of one weakness, even as Korean equities surge and the AI stories all the rage is because most foreign investors have these single stock concentration limits. And literally two stocks in the Korean index are powering almost all of the surge in the index that we're seeing. So every day that you have these big rallies and these two stocks, you're hitting up against those concentration limits are being forced to sell in order to rebalance your portfolio and remain within your limits. So this was another week where foreigners sold close to three yards of Korean stocks, they're YTD selling to an I-coping 65 yards to put that in context. We are not through half this year yet. And we have already hit 50% of last year's full year South Korean credit on South China. So you have a BOP on paper, which looks constructive. And then you have BOP in real life, which because of these offsetting flows are not nearly as as current as it positive as they would appear. There are other things going on in Korean macro and the BOP. So you're having incoming flows from World Government Bond Index, we've been in illusion, which are generally FX unhatched. You're having the morph sort of modulate near term bond issuance to keep fiscal and long end yield fears at bay. You're having the central bank across as considerably more hawkish this week than what the market expected. So I can't miss a pencil in 100 basis point rate hiking cycle from 50 earlier, supposed to end six to nine months before what it was earlier, which in any other currency would probably have been a positive story. But the one seems to be in its own world. Nothing except these equity flow dynamics matter. And then for the CNY, where we've had a little more love on our views, it's gratifying to see the fixings continuing to do the right thing. It surprised me with the pace at which it's taken out one big figure after another. So this week we are below $6.82 on the fixings below $67.87 spot. There was some angst in the market that the fixings might begin to plateau or flatline after the presidential summit. But it hasn't happened and it could certainly be that the Chinese are continuing to provide some ethics concessions to the rest of the world in the face of between trade relations, the U-China trade relations in particular, I didn't focus at the moment. As we speak, I think that is gathering of U-Trade commissioners that are going on in Brussels, reportedly, and trying to come up with a major crackdown on chief subsidized imports from China. So it sort of makes sense why FX policy in China is behaving in the way it's doing right now. So that's to CNY. Bolts, we are not complaining, we're staying the course on the view, but we're also conscious that-- we've had almost a straight line 6% moving on in LSENY since Q2 of last year. Well, the LSENY spot versus fixing gap is now 500 pages. It's very, very wide versus history. Investors generally don't want to add fresh BOLS CNY positions when the gap is this large. And spot-dollar CNY is extremely dislocated versus bilateral rate defenials. The extent of that misalignment is almost as large as we saw before the big turn-alonged in 2022 when the world went on a global rate, hadn't cycled right. So there are these things that you're paying attention to. You are conscious that there is a dividend outflow season that comes in China at the end of June. And then the dollar story is laid out at the beginning, maybe on the cost of a turn, the Fed story could be on the cost of a turn. So we are conscious of these factors that are starting to impinge upon this story in a way that they may not have had for the better part of the past year. Constructive CNY still. But I think there's an active sort of part process and totally about the best expression of the view. - God, thanks very much, Renem. Then finally, Lad, let's turn to you. Interested to hear just kind of a high level take on the ball landscape and whether you see anything that directionally kind of makes sense that match is kind of the sweet of macro views that we've put for today. - Yeah, thanks, but yeah. So for the point of the FX walls on the back of this fairly decent sentiment lately, we did see FX walls coming down to below 650, which is really the post COVID lows. The last time that we've seen the material overcome these kind of levels was in 2019, early 2020. Now that said, it does seem that FX wall is not really the only asset class that's been pretty much enjoying this right lower in the, from the wall aspects. VIX is below 16, rates walls being compressing. So from that point, it does seem like we are the levels that seem kind of fair to those cross-asset views. Can both sell off more? Basically, the headroom is getting really, very, very limited at this stage. I mean, back in that 2019, 2020, a few months of that soft pocket, walls that reach about one wall below the current levels. But at this point, it seems like yes, we could get a leg lower, but we're kind of starting to hit levels where realized wall, maybe kind of starting to hold how far it can go. We are watching some of these locations on the, like, AGM, some of the high yielders still, after some of the unwinds we've seen over last couple of weeks, they still contain some premium. But really, it's kind of starting to, starting to be a little bit of few only of those kind of pockets. Now, with the current state of the wall, it still remains very, very much support your carry. So yeah, I'm kind of watching pretty closely the developments on the high yielders, also cross-Sien is kind of interesting in the places like OZN and that seem like this level of walls optionizing those kind of expressions could be interesting. Beyond that, really, just kind of calls to keep my eye on a couple other places like, for example, the U.K. political risk does contain some of the premiums so watching there like Euro Sterling. For instance, even though now with the potential around Ward deal, then we could see a little bit messier dynamic there, but potentially this, oh, it is Q and Euro Sterling, which was even before the U.K. political risk is something that eventually can be factoring. And then also thinks like upcoming USMCA review on July 1st, from the point of direction all side, could have some, even though it's low probability this stage, impact on dollar max and dollar CADs. It is possible to construct some of the efficient expressions, conditional bullishness on the dollar max or dollar CAD with some of the other effects like bullish shows in dollar in order to kind of protect against those things. Bottom line for me is that these low wall levels are helping optional is carry. And in addition to that, we are watching those pockets premium like Asia, where it could be a little bit more downside on the, on the wall side and basically following the sum of those is this in credit stuff. We did go a little bit more details in that in our weekly publication. Back to your past. Yeah, thanks, lad. Certainly, look from my perspective, you know, Iran does not resolve yet. And the markets obviously repricing the Fed fairly aggressively, the real yield move would all kind of point to, yeah, some take up in the ball. He's from come on macro side. So simple fact to where you're, where you're coming from. But I think we'll leave it there. Thanks, everybody for joining this communications provided for information purposes only. Please refer to JP Morgan research reports related to its content for more information, including important disclosures, 2026 JP Morgan chasing company. All rights reserved. This episode was recorded on May 29, 2026.