Global FX: De-dollarization, GBP deep-dive, DM central banks

(upbeat music) - Hello everybody, Amira Chandon, go ahead of FX Strategy, JP Morgan, joined today by multiple FX strategists from across the globe. We have Juniathanase from Tokyo, James Naligan from London, Gungspad from New York. So, global roundup here. Look, it's been another week of the cease fire, but no real progress made on getting the flow of oil restarted. And this sort of keeps us in a bit of a limbo here. Energy prices have gone up again on certain metrics, but they've also normalized on other metrics. Like, for example, the gap between physical, dated crude and futures has collapsed. So that sort of removes one source of pressure. But certainly, we are starting to see some upward pressure on some things again, including things like Jekfeele. And in the grand scheme of things, if I take a step back, I would say financial markets are broadly speaking, still not pricing in any stress scenario. As we remain concerned about how things will play out, as we get to critical inventory levels that our commodity strategies are thinking could happen around mid-May. But meanwhile, the activity data, of course, continues to surprise on the soft side. And I'm seeing this particularly in the case of Europe over the PMI's disappointed again this week. So look, our basic effects approach and strategy still the same predominantly focused on carry on the idea that recession will be avoided, although that remains a tailed risk. So if you do get any more shocks, that's going to be a problem. But we do think high yielders in general will be more insulated compared to the low yielders, particularly since the high yielders tend to be the exporters in the most part. And the low yielders also tend to be the importers. So we do have that dimension of carry plus exporter-in-porter baskets. And as you know, in DM, Nokia and Aussie have been our favorite strategies, you know, favorite bullish candidates, if you will. And on the flip side, things like Swiss franc, Yen, Euro, CAD, we like to use as funders. And, you know, we are sort of mindly better from the dollar here, given the general path towards a ceasefire and normalization. But as we know, this is not going to be a great straight line path. It's going to be pretty choppy, so sort of keeping overall exposure light there. OK, so with that out of the way, three things to focus on in the discussion today, as far as I'm concerned. First, we want to focus on one bottom-up interesting story sterling. And we have James for that. The second is we're getting more questions on the de-dollarization issue, particularly on sort of the treasury sponsorship of the central bank, you know, by central banks. So we'll talk about what that really means for the dollar. And then third, we have central bank meetings, pretty active calendar next week on the DM side, so we'll go through that by region as well. So James, let's start with sterling. I'm going to push you a bit on this to keep things interesting. You know, both you and I have actually been fairly downbeat on sterling, I would say, you know, particularly versus the high yielders. It's just not a clean story compared to Aussie and Nokia. I think you've got fiscal issues, you've just got the energy and border issue, got impending political risks. And like I said, you had this general idea and view as well. But sterling's in the grand scheme of things held up OK. And you know, you are turning a bit more constructive, despite being focused on these henmen. So I wanted to focus on really what is driving your change in view. You know, since I personally find it pretty hard to get super excited about sterling in general. Sure. Yeah. Thanks, Mira. So I mean, first of all, the data that we got this week out of the UK, you know, I think we have to recognize good data when we see it. And, you know, we got a pretty sticky services, DPI print. We got a better labor market print, although there were some quirks there. And, you know, you got a round of PMIs, which at the same time as you're up under performed, there was some clear strength across the UK PMIs at a time where you might think that the Iran conflict would be having some impact. We got some decent retail sales data today. You know, I could go on. But, you know, the upshot is you look at UK activity data surprises. They're at five year highs. I mean, this is almost unprecedented in the post-COVID era. And I'm not going to sit here and say the UK economy's booming, but I am going to say, you know, there's a clear resiliency there. And it does remind me a bit of 2023 when, you know, you had the aftermath of the Russia Ukraine conflict in 2022, invested had a very cyclical mindset and including myself, actually. And as the market transitioned to more of a carry environment, some of those cyclical shorts, which included sterling at the time, struggled a little bit. And I'm quite cognizant of that. I can see some clear parallels to that today. So the data for me is quite important. And the politics we've been talking about, the Mandelson issue, you know, we can talk about the different candidates that might be on the ballot for the Labour Party. You've seen holy market probabilities for Starmer potentially stepping down while they initially started spiking back in February and sterling was quite sensitive to that. We've seen that sensitivity decline quite a bit over the past few weeks. I think Harry is one influence on that. But also, Harry in the context of what it means for the political timeline. So let's say hypothetically, Starmer does step down after the local elections in May. You have to think what's next. Well, we might not actually see the conclusion of the Labour leadership contest until the end of the summer. So that's where Harry comes in, because investors would obviously have to forfeit that carry if they were bearish on the politics as they way up, whether it looks like we could get one candidate or the other. Obviously, there's going to be some market friendly candidates potentially on that ballot as well. So we won't know likely over the summer. And that's just going to mean Harry is-- you're going to forfeit it. You're going to forfeit the accumulation of that if you're bearish sterling. So I think that matters as well. And if we are in a carry world, then rates spreads matter more. And you look at some of these pairs like Sterling Stocky and they are quite dislocated. And I think some of that-- again, goes back to that point that some investors are still in a cyclical mindset rather than a carry mindset. And that potentially could see some positioning migrate over, talking of positioning. The market is the wrong way around for this. I think it's probably not as short-sturling as it was, but I think the market is still short-sturling. So if there's a bit of a realization around the political timeline and how carry impacts that as well as the data, there's a real shift in the data this week, I think that can matter for Sterling. And how do you think the BOE is going to deal with things next week? Yeah, so I think they've set their stall out in terms of the guidance. Obviously, we saw some pretty aggressive shifts in market pricing as the conflict broke out. At one point, we were pricing four hikes for the BOE this year, which, to me, looked wrong and still would be wrong if it was-- I think if it was priced this year today, because obviously you have to think about demand destruction. And we saw Bailey pushing back on that, saying on several occasions, saying that they're going to take a more cautious approach, wait for developments in the conflict. And so that constrains them, I think, next week in terms of any significant hawkish outcome. But the market is aware of that. And we're not pricing anything for the meeting as a result. But I'm just watching in the minutes if there's any kind of the more centrist voters that might hint that the recent UK data as could mean that if they're warned to conflict, then there would be increased pressure to high rates. I think that potentially could see some hawkishness in the minutes. But on the vote, we're expecting a 7-2-- there's potential risks of say 8-1 or 9-0, which is-- it is a dovish risk. But I don't think sterling would be massively surprised by that, because we know that the Bank of England told us that they want to wait and be cautious anyway. And obviously, the forecast will be in focus. We've had a very sticky CPI print this week. We think that the peak in the inflation profile is going to be around 3.5%. That speaks to a little bit of the stickiness there. You could see sterling reacting if the forecasts are a little bit more on the hawkish side. The guidance overall, in terms of willingness to act, will probably stay the same. But I think for me for sterling, it's going to be-- are there any tidbits in the minutes around lean hawkish, or is there something hawkish in the forecast? Those are the areas I'm going to be looking at. And then potentially some marginally dovish risk from the vote. But you agree that more constructive on sterling is not the same kind of-- density is Norway or Australia? Yeah, I would agree. I think there's still a case for sterling to lag those currencies because you do have some lingering uncertainty around the politics. You do have that energy and port of status. So I still think pairs like sterling knocky can grind lower but it's really sterling versus the lower yielders where we've shifted stance a little bit and where valuations are a bit more attractive. Okay, thanks a lot James on sterling. So let's move on to the next topic now. I wanted to focus a bit on this question that I keep getting on de-dollarization, particularly in light of the central bank holdings of Treasuries falling. Two things to flag on this dollarization story. The first thing is if you look at equities, there is actually no salamadakah moment. It's going the other way around. The relative equity returns for the US is actually outpacing the rest of the world and I see that particularly to be the case versus the eurozone. If you look at the flow data that's signed here even from our equity strategist, for example, what we're seeing is that net net inflows into both the US and EM actually have state fairly resilient. It's Europe, that's the lagart. So that's not, you know, from a cyclical perspective, I suppose the main point is that there isn't really any sort of salamadakah moment here. The bond market, I think, is slightly different. You've got Treasuries, it's hard to ignore really that the custody, treasury custody holdings at the Fed have declined to their lowest since 2012. That's continued. You know, the last few weeks in the share of dollar and FX reserves from the IMF go for data as we flagged before also, you know, had fallen further. I guess to me, it's a two-part question, is this meaningful for the dollar both in the near term and in the longer term? And I suppose as far as the near term impact is concerned, I should just say that, you know, at least the latest bout of selling interestories that you got, or at least the reduction in holdings, has actually coincided with rising stresses in the system relating to energy prices and initially the stronger dollar. And that's not really unusual in this time. It hasn't really prevented the dollar from strengthening at the peak stress period, though. And that's typically what we see. So, you know, that's something to keep in mind. And, you know, the second thing to keep in mind is that as far as the near term impact is concerned, you know, if you take a look at what measures of balance payments, the financial accounts actually are the most correlated with the dollar, what we found is that the, you know, the tightest correlations are actually the net FTI and flows. It's not about net equity and flows, it's not at all about the debt portfolio and flows as well. It's really more about the FTI, which is sort of the stickier impact. So near term, I don't really view this as a headwind for the dollar because, you know, these kind of episodes, you know, can be quite typical in periods of stress. It doesn't really change the fact that, you know, we have been seeing that the share in of dollar and FX reserves overall has been declining, but that's been a ten year phenomenon. It's not it's not something that's that's changed, I would say substantially in the recent quarters from trend. The second thing I'll say is that, you know, they're all longer term factors to be considered here and that that could be around potentially what happens if and when US resiliency runs out of steam and, you know, what sort of dollar weakness do we get when the Fed eventually starts to cut if, you know, there is reduced reserve sponsorship and that is that is a question we need to think a bit more about and do a bit more work on, but but certainly as far as the near term is concerned, I think what you're seeing at the moment is very much, you know, not really having much of an impact on the dollar from this de-dollarization issue. So with that, let me move more to the central bank story. I guess we've discussed the B.O.E already. Kojnj, maybe we can talk about the Fed and the B.O.C. now and also is there anything new on the USMCA side for the Canadian dollar that we should, we should keep an eye on? Yeah, thanks, Mira. We can start with the Fed. So, you know, we do think the Fed next week should likely be a non-event for the dollar. The market's already not pricing much for the Fed three year in 2026. There is still the ongoing uncertainty around the Middle East and no SEP or dots at this meeting. We think actually the bigger storyline here could be around the idea that, you know, this is potentially chair Powell's final meeting and given some of his past commentary around potentially staying on the board even after his term as governor ends, you know, any further clarity on that side of things actually could be the most important takeaway for the dollar here, especially given some of the logistical hurdles still facing incoming Fed Chair Kevin Worsh regarding his congressional confirmation. So on the Fed, that's sort of the main angle that we're watching it from for the dollar. For the BOC, we don't think an next week's decision is likely to be a major driver for CAD. But we do see risks in a CAD-barish direction at the margins. So the BOC widely expected to hold its policy rate for the fifth consecutive meeting still facing the uncertainty around the Middle East as well. And higher oil prices have boosted the energy sector, but have otherwise been a drag for the rest of the economy. You know, they are updated forecasts being released, which we think are likely to be revised in a stagflationary direction with growth lower and inflation higher. And our economies have been flagging that they think the BOC is likely to view the weak growth as the larger concern here. One other interesting wrinkle is that the BOC has already flagged the upcoming USMCA re-negotiation as a big unknown and kind of a CAD Canada-specific downside risk to the outlook. And to that extent, we did have some incoming headlines this week from both USTR career and Prime Minister Mark Carney indicating that the US and Canada still remain far apart on negotiations. So, you know, our baseline here is that we do think the Bank of Canada remains on hold next week and all the way through year end. But if we're talking about the distribution of risks here, we do think that risks are skewed towards eventual BOC easing, even if the tone next week is neutral, given some of these downside risks that we mentioned. So, with the market still pricing around 35 basis points at BOC Hikes in 2026, we do see go for some of that to get unwound over time, which could prove CAD bearish at the margins. Thanks a lot for that, Kyrnch. So ECB, look, no policy changes expected. The market after pricing in almost two-thirds chance of a hike has stepped back. And nonetheless, I wouldn't say that this meetings are on event. I think it's going to be quite important. In the grand scheme of things that forecast lean hawkish, the survey data that's come out even this week, for example, is showing pretty firming inflation pressures. But then equally growth data is disappointing. The PMIs will be as well for growth and we got another growth downgrade from our economists as well. So overall, the question is, how is Lagarde going to really manage this? ECB communications, but it's hard to discern because they've gone from first focusing on the inflation narrative and then Lagarde and her latest communication and suggesting a more data to pen and approach. So we'll have to see what really eventually she sticks and ends up sticking with at this meeting. So I think that's going to be quite an important thing to focus on. What exactly is it that they're going to be prioritizing and how much? What I'll just say is that, you know, in the event we do get a hawkish outcome, I really wouldn't be looking for Euro strength, any Euro strength on the back of that to be sustained. Because at the end of the day, I think the underlying dynamics for the Euro have softened a fair bit. You've got the relative equity returns that are lagging pretty substantially versus the US, the growth metrics are lagging. The relative carry is also more, you know, is a bit of a drag. And if over and above that, in addition to the energy price shock, what we're getting is higher interest rates as well, that's not really a great growth picture. So I would be pushing back against the idea of Euro strength and my preference is still to use Euro as a fund of another high yielders. So with that, let's focus on Japan, Tenozishan, what are you thinking here in terms of the B.O.J. and what are the balance of risks going into next week? Yeah, thanks for the question, Amira. So actually, I'm changing to policy rate next week. How does it grow that we expected? And market expectation, and therefore, that next two weeks and the high has been the declining juni country and now pricing only 5% probability over high. But I think it may be somewhat risky to dismiss next week B.O.J. meeting as a non-event. In other words, even if B.O.J. hold as expected, it could still move again, and actually, it may not be so easy for the B.O.J. to make next week's meeting as non-event. It is more delicate task than that many people are thinking about, and we likely see some short-term broad-reaching surrounding that B.O.J. data announcement. Given the current setting, where Daryen is trading a key level, has 160, the B.O.J. is likely to be has a very careful to avoid the pre-reproduction of September 2020 and April 2004 ex-sales, where the WTOJ communication trigger the cello in Japanese yen, forcing the move to conduct the yen buying intervention. From these perspectives, in addition to regular statement and Governor Wetherspress conference, the boat split and the economic outlook in the outlook report will also be in focus. WTOJ is unable to deliver enough focused message using the Z-Fab test, again could weaken further after the meeting. Also, depending on how the iron moves over the next few days, the probability of the WTOJ later hike could change the unique country. So if the line lies into the 160 or the 161 by next Tuesday, the probability of a hike should be much higher than the 5%, where now has a market pricing in. If the WTOJ surprises the market with the late hike, it is likely to see the Hadaniji B&B. So although this is because I think that we will see has a some short term broadity along the next weeks, the YoJ meeting. Finally, I would like to talk about more intervention the probability. So we continue to think that more would step in the market before the iron line changes the cycle high at 162. So this is because the evening that I approach is 162, they do not come in the market. Market participants may interpret it as weaker interventionist stance and the WTOJ we see as a good light for your understanding. So relatively strong tone in the Ministry of Finance, Minister Kadehama, recently also suggested that intervention as a main auto platform here. That's from me. Thank you. Thank you very much, Junia. So that's it for today. Thank you very much, listeners, for joining 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 24, 2026.