Global FX: Cease-fire, the dollar, DM/EM FX impact, IMF round-up

[MUSIC PLAYING] Hello, everybody. This is Mirajandan. Go ahead of a fixed strategy at JV Morgan. Join today by Erindam Sandalia, Aneshka, Christopher and Patrick Locke, FX strategists from across the globe. So look, we've had another week for the market to digest the ceasefire announcement. Obviously, financial markets have responded in kind some more than others. Equities have more than retraced. If I look at FX, the high yielders like Brazil and EM, the Aussie Dollar and EM have more than retraced as well. The parts that are lagging, its rates with increasing yields that we saw hasn't really unbound in a major size. And also, in commodity prices, particularly energy, which stay elevated even though the direction there is still moving in the right way. And in FX, what stands out is that the low yielders, aside from maybe only CNY, have actually continued to lag this overall retracement move. And I think this is an important dynamic that can continue some more on that in a minute. But look, the negotiation is going in fits and starts. The news of the ceasefire itself in our view, I think is quite encouraging. It suggests certain pain thresholds have been met. And by extension, it does make us more optimistic. But Aviara, in other words, yet not really, obviously, our commodity strategists are highlighting risks that inventories will run down to critical levels in May. So that's a potential sort of tail risk that markets still have to contend with. But overall, this is a step in the right direction. And we've labeled that as a start to the end in our last publication. So we are cautiously optimistic, famous last words. But that's where things stand. So I guess the question is, what is the big picture of a currency is going forward? And I think for this, you need to take a step back and ask really what's changed since pre-conflict. And in my mind, there have been two regime shifts that have happened. Firstly, there was a growth regime shift. It went from being highly prosyclical to being defensive. And then there was a second regime shift which was on inflation, where inflation trend was on the downturn across the world globally, very broad-based manner. And that has shifted to being on an upswing. 70% of inflation forecast for the countries you cover has been upgraded. So what happens even in a resolution? I think obviously the growth regime can actually flip back to being neutral or even prosyclical over time. That remains to be seen. But it's more in flux. The more persistent outcome here is that we are in a higher inflation, sticky energy prices regime, even in the case of a resolution. And that makes the thought a lot more challenging for central banks. And it keeps, I would say, emphasis as far as effects is concerned, very much on carry. So we think there are two broad implications for effects, given this sort of macro landscape that I've outlined, one with sticky inflation, higher inflation. Firstly, it impacts the dollar view. And that is because of the simple reason that the dollar is an energy exporter. It's high yielder in certain respects. And so what this does mean is that the dollar view deserves to be less bearish than the pre-conflict levels due to this persistent inflation and energy pressures. If the sufficient to detail a medium-term bearish dollar outlook, not really, we are not really changing any of our forecast, for example, which still call for a medium-term dollar bearish view. But it does mean you have to be more selective and thoughtful in what sort of dollar bearish implementations you're putting on. And carry is going to be really a big focus. These implementations do have to be carry efficient. The second thing this impacts, I would say, for effects more broadly from a top-down perspective is the view on carry. And here, this is relevant because-- and I think it's a clear review for effects carry, actually, because a former inflation regime in general should mean that high yielders should outperform the low yielders quite considerably, just because they have more insulation, more cushion, to absorb higher commodities, prices, and rising inflation. And that's certainly the dynamic that we have been seeing. So the expectation here is, look for stronger turns from effects carry. That's going to be the main emphasis. And in VM, I would say that this has been a theme for us in any case, even prior to the conflict for several months. But we are re-engaging more in this theme, even starting this week. And our preferences are really for the high yielders, like Nokia and Aussie, specifically, where the bottom up store is a pretty decent as well. And the preference is for funding either via Euro, Yann, or this was Frank. And I would say using the Canadian dollar as a funder given its low yielding status as a dollar bearish proxy is a theme we continue to like, as well. So that's the kind of stuff that we are focusing on the DM side. But I do want to open the can for EM. And I want to start with UNESCO to discuss two things. I mean, firstly, you've returned to the old weight of UN EMFX following the ceasefire news. So that's that's at least consistent in sort of the more optimistic stance that I'm taking. So can you walk us through what really motivated that? And then let's talk about some of the bottom up candidates that you prefer, both in India and Latin. And by the way, congratulations on a great call on half, Yannah following the election outcome. So any comments you have on that as well would be quite useful for this discussion. Thanks, Yannah. I must say that I really like your introduction because several of the things you've mentioned become thinking about in very similar in Yannah. Perhaps the way I would phrase it is, when the conflict started, we actually resolved at the end of it. EM could even-- EMFX would even emerge stronger than very well before. And we conditioned it on three factors. The first one is that the sickle go backdrop wouldn't be materially dented. And I think we are still discovering how bad the show will be. But our economist draw solutions have not been particularly dramatic for EM. And not say economic activity surprising is of so far no value in dramatic for EM either. So I think the first condition-- I think we can admit it. The second condition we put out is that the US yield backdrop for EM would be a favorable mix, where if US yields real yields moved to OLA, which has actually started to happen from the end of March, or break evens Move Higher, so some sort of a market signal on a constrained bad reaction function. That's actually good for EMFX. So that's what all our historical analysis show if real yields move lower, break evens higher, that's a great combination of high overs. Now the third factor that we put in is very much go back to that carry point. So we still have a lot of currencies that have very good carry. But we actually thought that the bias for EM Central banks would be a little bit more on the hawker side, especially what's in comparison to that. And so far, progress on that has been small, I would say, EM Central banks have been quite cautious to react in any direction. But the one central bank have been monitoring very, very closer because I think it could be the bell weather, the bank that could set the trend is South Africa Central Bank. And what's really, I found very interesting is that this week, we are finally getting a bit more helpish commentary from the governor of the central bank highlighting that the short-cominfuation could be persistent and that they cannot afford to ignore it. So I think that third factor that I've mentioned that we might get reactions a little bit more on the hawker side with a little bit, at least stabilizing, if not improving carry. I think we might get that third one as well, at least in some countries. So going back to what we've done, we've gone overvading, obviously preference on the higher carry currencies. So overvading in our time, Mexico, BRL, in our region, Turkey, Hungary, on South Africa, my personal view is that we have to wait a little to see that's our reaction function, because carry is known that it has, but it can happen higher. And the view on Asia is market-based. For Hungary specifically, I think that that's a really good idea in credit story and we do not think we've seen the end of the appreciation, only if we compare it to Polish elections. The peak appreciation was six to 12 months after the election. In this case, we have a lot of moving parts in terms of fundamentals. You funds to be unlocked, we even have your accession being put on the opposition or now on the winning party program. So there's still a lot that can happen here that's on the bullish side. - Thanks a lot, Ernest, for that. And let's round that discussion out with Asia. And I think it's been interesting to me as a look at the cross sectional performance that CNV really stands out as a low yielder, which has been resilient in contrast to the others in your region where we've actually not seen as much as the mean reversion. So where's your head out as far as the various currency specific factors are concerned in Asia? - Yeah, but, Emira, so a lot of the nice things that in Asia, they won't really apply to Asia, our central banks are in no mood to high grades. The carry is available in pockets, but that carry comes at significant cost in terms of twin deficit risks. So I don't think anybody is falling over themselves to buy Asian carry. On your point on CNY, yes, it is, it's been an outlier, but it's not out of a character for China to remain more resilient through periods of global stress because we know that this currency is quite heavily managed. You can make a macro argument in terms of China having more energy reserves and having more alternative to switch out of oil into things like coal in order to weather a period of energy shocks. And then I think we've learned something about the resilience of CNY through this last five to six weeks of stressing global markets, which is that we always knew that China was managed tightly by the PBOC in that room, names the case, but also we may have learned something about the amount of fundamental support that the currency has from dollars of life from local corporates. And we got some data on that earlier this week in the form of March FX settlement data that SAFE publishes told you that Chinese exporters continue to sell impressive amounts of dollars in March, well in excess of seasonal norms, which is an important data point because still February could not quite decide whether the vast amounts of dollars that had been selling to the tail end of last year was purely a lunar New Year associated seasonal phenomenon or was there more to it? It's only one data point, but it does look like this is beginning to settle into a more durable trend that they have made up their minds in terms of how far dollars CNY could extend. I mean, it's only one data point. So wait and watch. But encouraging signs for CNY constructiveness that we have. And then there's a lot of talk and I'm sure back was in DC, the IMF World Bank Conference, they have picked up some of this as well around the rise of the petrol yuan and redirection of global flows away from the US towards China. And personally for me, this is a very much a TBD. There's no evidence of this in the hard data yet. So this is kind of the cherry on top, the element of mental convexity that is nice to have in order to have a constructive CNY view. I don't think this is essential. So that's where CNY is. I think the cleanest read across from CNY to other currencies within Asia or to Korea, which isn't a broad notation region, but it also has an idiosyncratic story in the form of wake being inclusion inflows coming through and these are going to last large numbers, four to five billion dollars a month. That's going to last all the way through November. And then second, Malaysia, which is a high CNY beta currency in the region. It's got positive energy balances on its side, one of the only currencies in Asia, which has this feature. And when the central bank resistance against currency appreciation seems to be at this point in time considerably less than in China itself. So those are the rules of rare constructive sports in and otherwise relatively downbeat part of the world, given what's happened to our energy balances in this period. I suppose India has a high yield there that is more on the vulnerable side for energy balances. So it doesn't quite hit the high carry mark, is it? Yeah, India is an interesting case because it is very much an idiosyncratic story in terms of how the central bank is being managing the weakness in the effects. It has to be acknowledged that they have got an underway to market off-sides with more stringent regulation than what we might have expected X-ANTY. And that is having an effect. Dollar Liner has fallen half a percent even today on the back of new regulations around oil companies not coming to the market to buy dollars and so on. So these are all current account management measures that they have rolled out in the past. Some of them are new, for example, what they've done on the NDF side of things. But I think it's comfort with I know that we share with many participants in the market is that the fundamental balance of payments problem has not been solved, which is that in addition to the ongoing energy shock, there's been a long standing story around capital flight out of India, which has got a lot to do with worries around vulnerability to AI and so on. And these are stop gap measures that can put a bandaid on the effects weakness right here right now. But it does nothing to overturn that fundamental BOP problem, which is why, as I said, I mean, there is caring for sure, but that carry comes at a cost and all assessment at this point is that we don't want to be in that cost for an industry. Yeah, I think sterling on the DM side is an assimilar bucket, but it's green is quite attractive, like I and R on carry within the sector, but you know, the political risks in the pipeline are keeping us more on the sidelines there. Thanks a lot Patrick. Last but not least, you've been at the IMF meetings this week. And what would be great, I think, for the audience and for us is to hear what are the most market relevant teams that came about in your discussions. Yeah, thanks, Mira. Great event as always, and as you could probably expect, the focus was generally kind of around four different lines around AI, China and defense. So kind of three things that stood out to me from the markets. I mean, first of all, in our space specifically, the dollar really didn't feature much at all. That's quite a departure from October 2024 in April 2025 when dollar was very much a focal point first around elections. And then afterwards with liberation day and the subsequent discussion around D dollarization, really, I'd say the formal discussions around the dollar relinked pretty much to kind of like boilerplate discussions about the dollar, not really kind of giving up its preserve status, no alternative, et cetera. So not a lot of like, you know, new frontiers broken, I would say on that front into a randoms point about, you know, the petrol you on in capital flow, that I would say that was definitely kind of underdiscussed really didn't come up much from the sessions that I said and much at all, which was interesting. On the sidelines, you know, people that I spoke to, they all have kind of kept a kind of a strategic or a structural bearish dollar tilt. A couple people that I spoke to were looking to kind of like reengage on that now that the ceasefire seemed to be gaining, you know, some traction there. And otherwise, you know, FX still not really a focal point, like I said, I'd say the discussions around euro may be indicated like a less bullishness now compared to last year. There was definitely a decent degree of focus on the lack of a single capital market and how that's constraining your up both in terms of, you know, preventing it from scaling up more obviously on defense, but also precluding euro's own ability to kind of act as a dollar alternative in a reserve currency asset when talking about kind of like, you know, depth and liquidity of capital markets and things like that. And then finally, I would say for regarding euro, there was some discussion that Vladimir Putin wants to see the the war continue effectively and definitely. So for those kind of looking for a potential near term resolution in Ukraine that might be disappointing. The other two kind of main, I guess market related things first would be obviously Iran. I personally was hoping to get a little bit more clarity about what the end game is here, but I don't think I got that. And I think maybe that's telling it in and of itself. But the first port of call is still kind of being debated. What is acceptable to the US politically in terms of an agreement across missiles, Iranian proxies, the nuclear program, US has perceived as having a little bit more flexibility on its angles compared to Iran and Israel. So it seems really like it's up to the US to kind of see this thing through. Really what stood out is like almost every speaker and almost every panel that touched on Iran expressed the same discomfort that we've been talking about for a couple of weeks where markets obviously pricing and kind of a more benign outcome here at the end of the day. But really that's not entirely in line with what kind of like the physical supply is looking at. So everyone recognizes that there's some disconnect and we really have to see some barrels flowing to validate what's already in the price. Nevertheless, there is still a reason to be bullish. One speaker argue that basically you can look through what's basically happening. You can see the settlement on the horizon, which makes this shock effectively a one off and there's pretty ample dry powder on the sidelines and that's set against a backdrop that's meaningfully different than 2022 where fiscal and monetary spigots were open. AKA it's not as inflationary as spike this time around and all that is good for risk markets. And then finally on the US obviously that was discussed along a number of different lines. But one thing that kind of stood out to me is that you know the new war Shved will be constrained I think in a number of different ways. Obviously the market the the economy has been on pretty solid footing heading heading into this year. There was consensus about that. And as well there's been less concern about kind of fed independent risk having gotten through the cook case. It also looks like this DOJ investigation will be expiring pretty soon. Even if there's kind of like some residual question still. But you know the committee is obviously pivoted a little bit since the Iran war. The dots as of March were not very forgiving in any sense. Basically committee split half between no cuts and half with only one. So really kind of ease in the herding and environment that's not especially conducive. They kind of continue to using from here. More over balancey plan that thought you know the market seemed a little to question whether that's really kind of kind of going to facilitate more rate cuts. Talks about $1 trillion cutting in the balance sheet is worth over a couple of hikes. And that's obviously very difficult to achieve in and of itself. So there's some constraints I think around, worth his ability to ease the suburb that didn't even exist perhaps one to two months ago. So Barquets kind of coming around to that. And then finally on the US, I would just say midterms coming into view, the Iran War definitely plays into that. The House was always perceived to flip Democrat, but now we're talking about could it be a material margin? And if the Iran War continues to have adverse effects at home, does the Senate come into play for Democrats as well? Long then perceived that the map was not very favorable to them in that respect, but this might just turn the tide enough and that could have some impacts there. And market is looking for potentially not just one, but two reconciliation packages this year. I'll finally add one is just to open up the Department of Homeland Security. So that's not really market relevant. But it sounds like if Republicans are not doing very well in the polls, we could see a more kind of grandiose, bells and whistle style reconciliation package perhaps to grind shore up some votes there. So that will be relevant for markets potentially as early as this summer. - Yeah, thanks a lot for that Patrick. I mean, on the year I'd say I concur, but not for necessarily the same reasons. I just don't think it's a great introversion candidate, in contrast to some of the other candidates that we have in FX, both in DM where, I think Ozzie and Rocky fit the bill a lot better, given their high yielding status and given the exposure to energy prices, given the strong bottom-up stories, and in contrast in EM, some of the stuff that Latam, in Latam and Emia that Aneshka spoke about, I'll bring more compelling stories than Yorodol are outright. So totally unborded that, but that's more, even you don't even have to go down to geopolitics or anything like that, or the political situation. You just need to look at where you are on the yield, growth spectrum and sort of come up with that lackluster conclusion on Yorodol. - But very good. Thank you everybody for joining. Thank you to the listeners. If you made it so far, please take a look at our website. If you want more detail or feel free to reach out to us, 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 and Company, all rights reserved. This episode was recorded on April 17, 2026.