Global FX: Bullish beta, bullish USD reinforced

[MUSIC] >> Hello, and welcome to this at any rate podcast. I'm your host, Arindam Sandhilea, and I'm here with my colleagues, Junit and I say Patrick Locke and Octavia Popesque to discuss a much awaited, keenly watched action-packed week in FX. We opened the week with some kerfuffle around the AI trade. If you recall, it's been quite a while since then. You know, that combined with the surge in oil prices, close to $110 on Brent, and more importantly, this breakneck rise in front of deals across many DM-rate curves. That seemed to generate a March 26 type anxiety around the beginnings of a stack-flationary impulse in the risk market and several questions from investors around those. These days, when one orders a word, a stack-flation, a recent effect causes minds to immediately raise back to 2022. But I guess we are here on this call to provide you a reassuring word that things don't look even remotely close to March 26, much less 22 on our dashboard of growth and risk indicators. And if you look at new story-based counts of stack-flation anxiety, it's barely visible on charts. And in any case, our beta, FX beta, i.e. carry, in monetary tightening environments of the kind we are seeing right now, tends to perform better than risk-beaten, otherwise it glasses such as equities. Because FX carry these days has a poor inflation bias. So I guess message number one to our listeners is keep calm and carry on. But the fact is that all this monetary tightening-related neurosis was very much a first half of the week story. New cycles move rapidly these days. And indeed, all of this began to receive towards the back half of the week as oil prices started to calm down somewhat. And most of the attention shifted to the 3G4 central bank meetings that took center stage midweek onwards, the FMC, Bank of England, and today the much-watched awaited Bank of Japan. So Patrick Clark, maybe let's start with you, the mothership, the Fed. Clearly, the sort of hawkish delivery that we were hoping for, given our bullish dollar stance, but I guess in some sense, it even surpassed our own expectations and led our friends in US fixed income strategy to up their yield forecast across the curve. So I guess the July FMC had taken away the September Fed has given it if you were constructing on dollars. You had a couple of days to now digest the outcome. The question is where to from here. Is there a supply of more hawkish feds of president store that can give us some of the big how to the DXY? Yeah, thanks a lot. There's a lot to unpack. And I guess just on your kind of like introductory comments, I sit here and maybe I'm naive, but you know that the stagnation commentary is against the backdrop, obviously, of like continually rewriting the US higher, right? So I think we've taken up our our third quarter tracking for GDP to like three and a half. Atlanta's around five. So the growth backdrop in my opinion here seems to continue to be quite solid, right? And I guess that I guess that the decent lead up into the into the Fed backdrop where the SEP revisions were all very kind of like pro growth, right? Unemployment rate is basically flatlining at four one for the entirety of the forecast rise in. So below Nehru, the Fed's estimate of Nehru at least GDP was taken a little bit up and inflation was also kind of nudged tire and doesn't really kind of trend back to kind of target until like 29, which Mike Firlini is right up kind of does suggest that there's kind of a, you know, a demand side undertone here. And I'll come back to that, but my point really kind of being that the initial outset at the at the two o'clock was generally I think, you know, quite positive overall. And maybe they're just kind of like, you know, for context. We've been a little uneasy kind of coming into this meeting, right? And so we were basically nailed on fully priced despite, you know, ex telecom pricing from the CPI trending at about 19 basis points on core, you know, the run rate on core CPI wasn't obviously altogether that hot on kind of a three month six month annualized basis, which is what, you know, worst kind of leaned into on the momentum basis. So there was, you know, some reason to have some misgivings about just how fully priced we were. And I think for that reason, we and our rates colleagues have been noting probably that like, you know, majority of potential outcomes here, even if they delivered the hike, probably skewed towards not exceeding kind of expectations and pricing, right? So for the dollar, it was really, I think, quite constructive, the overall tone, the message and the directness of the delivery, actually managing to take this short annual higher and the dollar higher by extension. So I think kind of threading the needle on the potential dollar positive outcomes here. Really, I think, you know, quite solid at the two o'clock. And then again, I think, you know, the message from the press conference was also reasonably reassuring. You know, the main kind of quotes that we took away were the removing the dose of accommodation, hard press to describe, you know, financial conditions as restrictive. We'd heard the latter at least a little bit before, so it wasn't like a, you know, a glaring new one. But neither did he kind of suggest that this was kind of one and done, right? So he didn't really kind of like repress dollar upside or anything like that in the press conference. And if anything, he kind of leaned into it against the backdrop of, you know, the dots, clearly signaling more for this year. And then very much open-minded about next year, where I think, you know, a three or four looking for cuts kind of tilted the median back to unchanged, but a decent, not still looking for another one next year. So I think all together, that was pretty solid. And, you know, I think for perspective, we continue to kind of like shore up the kind of the hawkish side and the credibility concerns that emanated from July, from Jackson Hole and now from this week. And I think something important that we show in the weekly, please feel free to see our publication, is an exhibit that started to show that the dollar discount really started to widen basically immediately after the July F on C. Now, I'd be remiss if I didn't cite that that was also two days before the BOJ intervention. And we know that, you know, dollar yen trading around like it has can obviously impact how the dollar overall screens versus fair value, but looking on our dollar, twice basis where the yen weight is not altogether that significant and even the DXY basis where obviously that overwaste Euro seeing that kind of risk premium expand after the July F on C meeting. Certainly, I think stands out. And I think goes some ways to help explain and contextualize it, you know, the dollar hadn't really been rallying and kind of a team minus six month basis into the first Fed hike that we would normally kind of expect. And so I think, you know, this week's delivery, the hike and all the kind of color around it and the SAP and the dots, I think probably helps remove any kind of residual semblance of concern about, you know, the credibility issues and the independence issues and things like that. Those are things that we hadn't really been leaning into in a general sense anyway. But the risk premium chart, I think is generally it's hard to kind of like dismiss entirely. So maybe this perhaps on shackles a dollar a little bit in terms of getting that valuation tailwind. And at the very least, I think giving it just kind of like a new baseline of support i.e. the Fed shouldn't be an obvious drag to the dollar from here at the very least it should be neutral to potentially not positive. And so the question I think you originally posed is kind of like what can take the dollar higher from here on the Fed side. And I would probably point to three things aside from the valuation itself. First again is like coming back to the historical behavior. Dollar has kind of shrugged off again. It's tendency to appreciate in the run up to the first Fed hike. I think again that can kind of maybe course correct and given the given the context of last couple of months. But I think realistically the point is more that on a three month forward basis, it looks like that, you know, the first Fed hike doesn't necessarily have to mean the peak in the dollar. There are definitely instances over the last 30 years where dollar continues to appreciate at the first hike. So I think that's reasonably encouraging. Second, I continue to point to kind of like, you know, OIS forward curve shape. The U.S. obviously has 75 basis points baked in, not together altogether unreasonable given kind of the state of the U.S. cycle, you know, the context of the three or six cuts that we've had over the last couple of years kind of like unwinding those. There's been obviously analogues back to the 1999 2000 period. So I don't think that's like obviously way off sides, but further out into kind of the two year sector of the curve, the U.S. is kind of like flat to lower. Rest of G10 is still higher against the backdrop of kind of like U.S. growth and inflation dynamics. I feel like that's something where potentially the gap can narrow in the favor, I think, of the U.S. And then I think finally, and really kind of like the big question here is, you know, what could get the Fed really off the sidelines, i.e. to deliver more than just, you know, an unwinding of the of the eases from last year, for instance. And I think the way our economists describe it, which is correct, is kind of like more of a demand side shock, right? But I think what's interesting is you started to see a little bit of early evidence of that in the in the SEP from this month. And also, I guess maybe a little bit from June, but basically, you know, looking again at the labor market, you rate for one flat below Nehru persistently growth pretty strong inflation also getting revised higher that has the makings of moving beyond kind of like a supply side led inflation spike which obviously we know that you know the central banks only have so much power to control barring more obvious fillovers like indirect and second round effects that kind of thing so this is more of a traditional kind of demand side led inflation stronger growth putting pressure on prices alongside a tight labor market that sponsors wages you know wage inflation that further increases services inflation you know that starts to kind of I think open up the horizons for what the Fed can and would need to do and by extension I think the dollar in that case could get kind of a much stronger second lag here but I think realistically given given the trends of the data the momentum it's not very obvious that that's we're going to have enough data on that in the next couple of months to really kind of trade that kind of thing that's kind of a three to six months exploratory phase I think so I think the bottom line for me is based specifically off of kind of like you know the Fed trajectory and what we learned this week risk seemed reasonably balanced for the dollar around the Fed trajectory but you know bigger picture I do see a few different channels that could take the dollar higher on the back of the Fed depending on how the data plays out yeah I don't agree with almost all of it and I'm just just to reiterate a couple of points that he raised into the meeting heard from several clients including some some of our colleagues internally that the dot plots were not very important and certainly the press conference performance you know superseded the dots to a significant degree and what we learned is that the dots always matter and whether they'll stay with us for not in coming months is a TBD but the thing about the dots is we know that these are market exercises the intermeeting intercept meeting move up in bond deals is a fairly good predictor over these dots land up and despite this the market tends to be serially surprised by the move in dots so always have this on your dashboard the second thing that struck me from your comments is you know this idea that the dollar doesn't always peak with the first Fed height that is absolutely true in general for the month or so falling the first Fed height there tends to be some sort of serial correlation or momentum higher in the dollar we'll see whether it goes given the underpricing of the dollar leading up to this point but also I should flag that there is a seasonal window into the back half of September and there is also another one sometime in in October where generally risk is somewhat on the back foot and historically the dollars tended to have a bit of a bit just to be something to be aware of and I think this big question the last thing that we mentioned on you know is this a contained cycle very much sort of refer our listeners to an excellent piece from our economics colleagues earlier this week where simple Taylor rules across DM economies show that without even disturbing our star and there's all sorts of debate about where the AI cycle leads us to on that particular variable you know it is not difficult to envision terminal rates for the Fed funds in this cycle somewhere in the four nine sort of area obviously that's not at house forecast but I think we should also be aware that almost at every point this year this idea that X amount of tightening is pressed into the curve and that seems excessive has been subsequently proven incorrect by the price action so I think humility is an order when we look at curves pricing and whatever they are pricing and saying that too much is in the price right so you know I think this is a very important space to watch going forward. So turning to you now Junior for the other very keenly watched G3 Central Bank meeting this week the Bank of Japan you know as has become customary fail to outhawk expectations. I've got a couple of questions for you but maybe start with the most obvious one what did you make of the meeting today where do you think this leaves us on the DOJ rates reaction function from here and most importantly for our asset class where does that lead to the end view. Yes thank you for the question Rindam. So today at the DOJ it's a policy rate by 2020 25 basis 0.2 had 1.25% but I did it in line with expectation but as you say at the 722 the board was a rubbish surprise board member Sada who had also argued for no change at the June hike again voted to keep late and then this time board member Sato joined him in voting for no change yet but also appointed after the inauguration of the tachai teadowing session so October and are widely seen that the regulation is to members there are dissent can be read as a signal that despite the US pressure for the DOJ to continue normalizing policy monetary policy the tachai te administration basic stance might not have sifted still favoring recreationary policies and not wanting DOJ to accelerate base of late heights governor with a press conference did include some hawkish elements but so he did not the rule out the possibility of faster base of hikes or 50 had the basic point high that might be not enough hawkish to offset the rubbish 722 to board so this is reason why they continue to rally now reaching high at 1.57 in recent weeks regarding the about reaction function rising VOJ rate hike expectations have tended to support again one reason is that since the coordinated intervention at the end of july market increasingly believe japan is government would tolerate faster VOJ tightening to lead to US pressure on the VOJ to accelerate the monetary policy normalization this has reduced fear that VOJ would hold behind the curve under the tachai teadowing session pressure from this perspective today's outcome to dissent both from regulation is to members as who was appointed by tachai teadowing session could really unite behind the curve concern accompanied by higher risk premium and weak I think we think risk is still treated to other crew back in the current market pricing in at four VOJ hikes at the moment market has already had the price in one spark water at VOJ high in the coming quarters so our midterm based case is that they're integrated in 155 to 165 ranging but today's VOJ meeting reduce the risk of a downside break of the length meanwhile increase the likelihood of a move to the midpoint of the length thanks a lot june so I guess if I were to play devil's advocate to your comments what I'd flag is you know this this idea of the B.O.J being behind the curve or not and one notable change in the yen fixed income spaces that the front end of the yen OIS curve which was trending steeper in a straight line for better part of the past 12 months that broke trend and started to flatten around the time of this joint intervention that you flagged and I guess if you are a yen bull the one thing you'll take away from today's meeting is that the flattening of the front end of the money market curve still remains intact we haven't seen an obvious adverse reaction to today's meeting so this is the this is the TBD whether this reclamation of the B.O.J's monetary tightening stance over the last six eight weeks whether this lasts or not but I don't have a follow up for you on the yen specifically as it relates to the holiday calendar in Japan and intervention risks so post B.O.J I've had some clients ask whether there's a threat of intervention in the coming few days because Japan is out for silver week and B.O.J might or more might turn opportunistic and and sell dollars in that phase just making for your views on that please yeah some sort of a question if I'm very likely to bother and as I say harder than it reaching at 160 of course other intervention speculations are the busy we've been at the rising especially how they're heading into Japan holiday period other next Monday to have the win today and the weekly Japan natural holidays however the limited intervention capability has a own both side I mean US and Japan I would not expect outright intervention actual intervention unless the approaches or breaks about the recent high at 164 so about intervention capability Japan has already conducted about 17 trillion yen of effects intervention this year and this effects reserve has fallen by a roughly 15% even how difficult it would be to rebuild these out back to the pre intervention level we believe Japan's remaining rooms for the further intervention as a former year is limited for the US I want to be to wait that the intervention was conducted not the entire year but in U.L.A in my view this reflects the fact that the top US priority is stability in the US treasury market not the direct market so that a setting intervention is interpret as US tolerance for Wikadara and that this would heighten the risk of US treasury sewers the PT is a US treasury a secretary of percent likely want to avoid. This interpretation is correct and the US intervention is effective to really have a call limited to the euro end. So intervention capability would be very limited. Other since US holding so euro in their FXW is quite small. That's for me. Thank you. Okay, interesting. I'm sure there are a range of opinions on this. I'm sure many market participants judging from the flavor of the questions believe that capacity is not a constraint but we shall see. Very interesting next few days ahead of us for the end. Thanks, Tony. Right, so we discussed the Fed. We discussed the B.O.J. Octavia. You had a punchy call on the one European Central Bank meeting going into this week. We went in with a bullish sterling bias into the B.O.A meeting. So question for you is how did you read the outcome and what do you think sterling goes next from here? Here and then yeah, it was a bit of a tactical disappointment to sterling bulls like ourselves because the bullish tail risks didn't realize. So there's two things on that. The first is that they held with a 6-3 vote which was the base case and they did shift more hawkishly meeting on meeting and suggesting an November hike but it probably wasn't quite hawkish enough to meet what was likely a high bar for markets considering several hawkish pivot by central banks recently. And second, there was also a surprise on the QT side, specifically the point around potentially selling a portion of their holdings to the DMO as opposed to the open market, which contributed to a long and guilt rally. But on the effect side, we do think implications for sterling are limited in the end because the B.O.A is still poised to hike and you know selling government bonds as opposed to buying them and these are technical changes of limited scale in the end. And now ultimately beyond the B.O.A, we do continue to think sterling can do well in this high yield dispersion environment because sterling is still a relative high yielder with NG10 and growth has continued to be the expectations and it's moved up in the rankings of our T-model as well. So we're staying constructive there particularly versus the lower yielders in the region like Swiss and stocky. You know, I like this bullish sterling view with somewhat contrary and within the constraints of how contrary and one can be within G10FX. It seems like we are swimming somewhat against the tide of a generally sort of downbeat view of the FX client base on the pound and I mean the data that we got like today was retail sales and was a blowout retail sales report across all categories. So this idea that you have a highly concurrency with growth beats, with a prepositioning that is somewhat bearish and this persistent concern around fiscal risk premium and swimming against the tide of that. I kind of like the sound of that. So away from the bank of England you have two or three other central banks coming up next week, you have the scandies and SMB correct, is any of that going to be meaningful for FX? Yeah, the bottom line is that don't expect any of them to change our big picture views on the currencies so which are that we're bullish, not key and then bear Swiss and stocky. Any surprise on the scandies might lead to knee-jerk moves on the day but beyond that we wouldn't expect changes in the terminal rate pricing really and not key remains a high-yielder and stocky remains a low-yielder. So on the three in detail firstly on August bank inflation and growth are a bit below their forecasts and our economists expect a hike in the fourth quarter and markets are pricing that fully as well but also a 50-50 chance that it already comes now. So if they don't go next week which is our biggest case, Nokia might be under pressure on the day but ultimately it's still a high-yielder in G10 and we have discussed our structurally bullish bill on a Nokia the past few weeks which wouldn't change even in that scenario. And then secondly on the risk bank, core inflation is in line with our forecast now and a very low at 0.5% year and year and growth is above their forecasts but for context at the last meeting they were both running even more so above their forecasts but they downplayed the inflation part in particular and chose not to signal a higher probability of a hike at all which was a double surprise to us markets and now at this meeting the main red flag for them is that the currency is around 6% weaker than their forecasts which together with the energy price moves may add some more urgency and our markets are pricing four basis points of a hike next week but ultimately if they go yes it can provide tactical knee-jerk relief to stocky but again more medium-term it's unlikely to change the already pretty bulky terminal pricing and stocky remains a low-yielder in the global context even if you had a hike or two. And then finally on the SNB I don't expect it to be much of a market mover that would have set Swiss funding since inflation is still below their forecasts and has been very much at the lower end of the target range at 0.8 on the headline and I think the ballads are also very high to out-hog the market expectations of two hikes over the next year even if there was to be some incremental hoggish shift and acknowledgement of higher global inflation pressures. I understood excellent so let's leave it there for this week guys I think for our listeners the basic message is bullish beta bullish carry and bullish dollars is how we want to rob suite of FX views for the next few weeks let's see how it goes but thanks to all our listeners for tuning in and this communication is 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 Chase & Company all rights reserved this episode was recorded on September 18th 2026