Global FX: Mid-Year Outlook pushbacks, payrolls, CNY, GBP

(upbeat music) - Hello and welcome to JP Morgan's at anyway, podcast, this is Mira Chandan, co-head of FX Strategy at JP Morgan. Join today by my partner and co-head of FX Strategy from Singapore, Arun Dupts, Sindhilia, and then Patrick Locke and James Nelligan Senior FX Strategist in New York and London. So we've been talking to a lot of Fox lines about our media outlook this week, having published last week. So thank you for the great discussions that you had. And what I wanted to start off this particular podcast where there's just talking about a few questions that came up, frequently asked questions that I think are just what, you know, clarifying on, you know, some of these questions. And by the way, as you know, just to set the stage, you know, the view that we've been actually painting for FX is a bullish beta, meaning bullish on carry and a bullish dollar view. So we think, you know, we think carry can do well, FX carry can do well, particularly, and especially if it's a non-dollar funded carry in a variety of Fed outcomes. And then we also have a bullish dollar bias and we've been lowering our sites on your dollar towards 110, and to the mid 160s. So the questions and the pushbacks we've had, basically, is firstly, are we blowing, or blowing really the possibility of Fed Hikes? Yes, nine out of 18 members are hawkish, but only three were probably water. So does this dot pivot sort of speak even matter? And then, of course, you know, if one and a half Fed Hikes are already priced in, so the market's pretty much already there. Why be bullish that all are now has a risk toward, you know, change, you know, that's still attractive. Can Cadi continue to do well in particular, and Hygly is actually hold up if the Fed is hiking. You know, that's a central turn into our view. And then finally, with all prices actually coming off, as quickly as they are, can central banks deliver less? And does that mean that actually this reduces the odds of a Fed Hikes? So I think all of these very valid questions, and I'm just going to highlight some of my main observations here on this, and then maybe open it up to the team to see if we get any pushback or any agreement on this. But, you know, starting with the first issue of, you know, does the Fed doctorate matter, even though only three were water, because I think it does matter, is the direction of travel that matters. And the point that Bruce Kaslin's been making is that the economic break even, so to speak, for the Fed are pretty low in the sense that the unemployment, you know, the unemployment trade forecast that the Fed has for the end of the year is 4.3%. JP Morgan's forecast is 4.1. So we're actually looking for a tight labor market at then what the Fed is projecting at the moment. And then secondly, actually, the run rate on Core PCE needs to be 0.22 month on month, or below for the rest of the year to actually match the Fed forecast. The six month average on that has actually been running almost at 10 higher at 0.34%. So in my mind, absolutely, you know, the Fed pricing, the Fed pivot does matter. And obviously the market is, as far as the pricing is concerned, has already moved to the price, but I think only, you know, but 40 basis points are so of the Fed hikes priced in. And importantly, the reprising that we've had on the rate side is not really being reflected in effects. So fair value for your dollar, for example, is still closer to 111 or so. And I knew sort of combined that with this, you know, historical sort of playbook where your dollar average is gendered to weaken, going into the first Fed hike, I think that combination is telling us that is that there's actually still some room for the dollar to actually catch up to fair value here. So it makes sense to be bullish the dollar, but undoubtedly this requires, you know, we'll see where we are going to payrolls, but it does need to take a bit of a tactical approach here. It is data dependent and it does need the labor market starting to unfold. And of course, core PCE to be running hard, which it has been for what is worth for last six months. It does make us do the last two questions, which is can, can high yielders do well when the Fed is hiking? I think it depends high yielders versus what? Because if it is just a high yielders versus the dollar that the one is thinking about, then if the Fed is hiking, the dollar will initially strengthen versus everything in a broad based manner. So, you know, the dollar versus high yielders will be stronger just as the dollar versus low yielders will be stronger, but what we've been really been pushing hard is that the caddy train is actually best expressed through non-dollar funders. So, you know, things like Yoro Swiss, Ian, I mean, you name it, DM is actually full of them on the high beta side, stocky, kiwi, cad, all of those are very much well in play. So to us, that's the important kiwi, not really talking about the dollar story, you know, outright on the dollar versus the high yielders. It is a crossplay. And then finally, this question around, you know, if oil comes down and has been coming down, can Fed hikes really still be in play? And I think it's fair to ask the question globally, yeah, globally, this could mean that you get and aggregate less monetary policy hikes than what markets were previously expecting. But, you know, even Bruce Cazman, who's, you know, and importantly, Bruce Cazman, who's a chief economist, is pointing out that the reason that the Fed dots actually pivoted is actually an entirely different reason as to why the repricing has happened for other central banks, which has been driven to oil, that's the latter case. In the case of the Fed, it's the inflation disappointment that actually started to seep into the data well in advance of the conflict. And it's the labor market pick up, the increase in the NFP prints that suggest that labor market tightening could be underway. So no, we don't really think that lower oil prices automatically takes Fed hikes out. It's actually possible that takes or reduces the hikes for non-US central banks. And I think that in fact, Fenton's, you know, sort of the dollar positive narrative more than anything else. So I've spoken and taken up quite a bit of fair time already, but happy to open it up to the team to see if there's any sort of pushbacks or any additional thoughts on what I've just said. - Hey, I just make two quick points in the back of what you said. First is in my own conversations with clients, I get the sense that there is an extraordinary amount of focus on the worst Fed's willingness to act in a certain manner. And somewhat less discussion of the ability to do so based on the incoming data. So I've been making the same points that you just made, which is if the data flow is of a certain type, jobs doing what those expect tend to do and inflation doing what we had in our profile, I think as a year rolls on, the ability of the Fed to do anything other than what an orthodox Fed would do, keeps getting challenged more and more. So I think the data is getting here. And what Chair and other members of the committee may or may not want may not matter or hold on more as we go along. The second point I'll make is that through the course of the conversations with people the last week we can have, it's become quite clear that there are many more question marks around the late straight than there is around the dollar trade. So for all the reasons that you discussed, including oil, you could question how far and how far is the global sense of the banks would go. But because our dollar view is predicated on more than just the Fed reaction function, it is predicated on various shapes of exceptionalism around growth, around AI and ability flaws that we've been talking about. I think you can win on the dollar trade in many more ways than on getting on high rates. And I think it's seeked into clients over the last several days that the dollar trade has a bit of asymmetry to it that maybe the late straight does not. I think that realization is important as far as the realization of our own forecast on the dollar is concerned. And I still really hope that more and more clients bind to this line of thinking. I mean, that makes sense. I mean, the only thing is that my one offset, I mean, given enough time, the lower oil prices could also mean that the shapes of US exceptionalism we're seeing actually start to maybe even take a step back. Although one has to imagine that if employment growth was already strong to begin with, the nine-gating-dore energy prices that you actually get at a resurgence in US activity data as well. So it becomes more of a synchronized story rather than a differentiator with maybe the Fed become the differentiator. But yeah, that's an interesting point. James, are Patrick, or maybe Patrick, you can go first? Yeah, I mean, I think you mentioned an important point. I mean, like the skew of risks to US activity. Obviously, we've had a string of stronger labor market data. We've also been revising it up kind of at the same time, which that combined with kind of the 4.1% unemployment rate forecast that you mentioned leads me to believe that the skew of risks is towards the US kind of outperforming expectations rather than disappointing, right? And I frame that against the SEP, which you described. So we have core PCE of 3.3 this year. Like in their unemployment rate forecast, the median is 4.3. And that effectively brings you to a median that is 3.75 in the dots. That to me is an extremely fine line to tread. We're basically, I think if you have any even modest surprise on the core PCE outturns or on the unemployment rate coming lower, I think you'll start to have to see some critical mass moving in the dots that are currently anchoring the dot, the median dot for this year around unchanged levels. So I think they really have kind of a-- fine line here where any kind of activity or inflation surprises potentially move the needle. And then I guess the final thing I'll just say is that we've been pressed on what the timing of all this might look like. Some clients asking, "Could a July Fed hike be live?" I think probably not. You're probably going to want to see more accumulation of evidence from either the PCE side or especially post-oil falling or the labor market to do anything like that. So I feel like September is probably the potentially earliest where we're actively debating kind of a live decision. So I think that's probably worth flagging as well. Yeah and I suppose it's data dependent though and depending what we get between now and the July meeting but that's fair enough and do you have anything from you on this? Yeah I think it's become fashionable to say that because the oil prices fall and then the inflation outlook is getting softer and I think it's just too simplistic. We have to think about core. You have to think about the labor market and you look at the sector or breakdown of payrolls and it's showing that the more leading sectors are turning up, tells you it's not a kind of less likely to be a false start in the labor market and you could get a real acceleration with core already on a kind of high two handle. Core doesn't have to necessarily accelerate but if you got labor market accelerating then the Fed has a bit of an issue. I think the extent of the curve flattening that we've seen in things like Tuesdays tends. Historically if you look at that relative to the labor market it's telling you that a labor market turn is coming so I'm very conscious of that and when I see data like the core PPI data I mean core PPI has gone from a three handle to a five handle in the space of six months. If that's not alarming then I don't know what is. So yeah I'm quite cautious around just the basic inflation views on oil. Okay thanks a lot James and I think you are making a point earlier as you're discussing something about the European QMI as well. Yeah I mean it's a potential new angle I mean I've been quite constructive on the cycle globally but we've had curamcharteries come out with his QMI data for Europe this week showing that it's the first time his font metrics of but Europe in contraction territory just in terms of the QMI not necessarily recession for the first time in two years which typically leads the cycle leads equity internals. So it's an interesting input and it tells you that maybe you know for currencies like stocky that are a bit more cyclical and high beta that's just an added point you know on top of the Davish Ricks bank etc to think and it just adds a little bit to this this idea of US exception was it I think. Yeah although I guess with this we have to be a bit careful because the data that's coming out now is reflecting obviously much higher energy prices and these things can turn if energy prices are lower but I think it's a timing issue really I mean how quickly does the Fed have an affirmation to actually turn more hawkish and you know instead of actually engage in hikes versus how long does it take for confidence to come back in the in the European data so that's that's something timing wise we'll have to keep a close eye on but we do have you know talking of more imminent factors you've got payrolls next week Patrick maybe you can give us some pretty detailed thoughts as we go into that number. Yeah so a lot of it comes back to how we're framing kind of the Fed discussion at the outset but you know for starters obviously I think we know there's sufficient evidence at this point that private sector labor demand is improving so we kind of know that one already so I think the key the key arbiters for kind of the dollar outlook related to next week are more tied to the unemployment rate and to wages I tend to think about this and I tend to think about the SEP via the Taylor rule where even if you hold inflation constant if you have a falling or declining unemployment rate obviously that that implies tightening the output gap in a way that should be inflationary over time so any move lower in the unemployment rate again against the backdrop of a 4-3 forecast in the SEP I think is going to continue to make the Fed uncomfortable with the current stance of policy but also though I would flag that kind of the flying the ointment from the last payrolls parent which was obviously perceived to be very hot in general. The run rate of wage acceleration is actually quite light and unit labor costs generally in the US are basically it's cycle lows and obviously like you know pressure from the labor market stems really through wage inflation that passes through to services inflation that potentially could keep kind of like that core or inflation bid over time so I think realistically you want to see obviously private labor market demand to continue to support the dollar but you also want to see that with a lower unemployment rate passing through to wages in a way that obviously kind of you know motivates the Fed to be a little bit more proactive so I'll be looking at kind of those two pillars on top of the headline of the private payrolls data. Okay thanks a lot Patrick I read them let's move to you you've had a pretty high-touching move in dollar C&H to speak I mean I guess we had a grand three quarters of a percent higher so I mean yeah in the grand scheme of things not that much but still move higher in dollar C&Y is worthy of comment so what are your thoughts on that is this a decisive turn is it finally catching up DXY which is my personal bias as you know. In yeah so you know spotted move up by C&Y standards I guess it is it is notable it moved up alongside fixing at one stage the fixing went above 682 before slipping back and again we are hearing a lot of profit taking and protection buying on cash bullish C&H positions and all seasonally this is the dividend outflow season out of China so I guess that supports the narrative so on paper Chinese companies are supposed to pay something of the order of 65 or 70 billion dollars in dividend outflows in practice I think a lot of this money is held in foreign currency anyways and so it doesn't require C&Y to dollar conversion per se but I think we live in narrative driven markets and this is the narrative of the moment it will not surprise me if C&H were to back up even more over the next two weeks which is when this dividend outflow season peaks but I think ultimately the right lens to view C&Y through I think is the balance of payments it's not really Chinese macro it's not growth officials and very differentials as much and growth data in China may be rolling over but if exporters keep converting their dollars if China's large services deficit keeps shrinking because of a surprising influx of foreign tourists in addition to domestic tourists not going out anymore in the way they used to in the past if foreigners are going to buy Chinese stocks and bonds in increasing numbers as they have been lately and if Chinese authorities you know become less accepting of domestic outflows and tightened regulations around them as they have done over the past month then I mean I think it just mathematically implies more demand and supply of C&Y I guess and on top of that you'll add on BBC's fixing policy in the lead up to the next presidential summit I think it's hard to tell a story that medium term don't thus on C&Y trend has been disrupted in a material way but I'm open minded to the idea that spot can go up a little more in the short term but I think this is net net at least at the stage it looks to me like a healthy lens and actually it may have a positive side effect over the last couple of months investors have been a little gun shy of chasing the bullish trend in C&Y because the fixings had been at least 4 to 500 bits above market spot and that looked like a prohibitive spread but if you are going to get this sort of range set closes that gap or something that a little more palatable in the 100 to 150-bit zone then I think once this wash out sort of runs its course you might find fresh buyers of C&Y so let's keep an eye on that I think it's an interesting local jump in the trend but gone to my head I don't think the trend itself has changed very much. I get thanks a lot Adam I mean this is this is going to be one thing we should be watching pretty closely because this if DXY is going up and then dollocy and Y does start to turn I think it can be pretty meaningful development for markets but let's see how that plays out. James let's move on to you obviously pretty good out of consensus call and sterling I would say you're sterling at the lowest here but you know I think we've got other stuff going on in and knocky for example where you've had a fair bit of fun that performance this week and Swiss weather I think that you've stayed out a bit you know you've obviously been a bit more better showing it but any updated parts after this week. Yeah sure so I think we're sterling now the focus is on next week we're going to hear from Burnham there's also the ongoing issue of the chancellor I think I think our message is that there's you know potentially going to be a bit of a lack of detail. And so to get the long end of the UK curve to worry about this just yet, we think it's a little bit early. You could also have, as you were saying before, mirror some of the benefits of the lower oil price feeding through to say the UK PMIs or some of the other UK data. I just think with Burnham next week there's going to be a lot of talk of devolution policy, a bit more weight on local governments trying to advocate localism. And I think given the advisors he has around him, there might be talk on flexibility on fiscal rules, but I don't think it will be something we hear a lot of detail on. And so there's potential for the market to kind of fade any immediate knee jerk reaction there. And on the chancellor, you've seen betting markets this week raise probabilities for Ed Milliband to be chancellor. We've been playing this down slightly. I think in terms of fiscal risk premium, I think more of the danger actually comes from Burnham himself rather than Milliband. And this is something we can worry about closer to the budget, but through July, it's going to be a bit more difficult given that the political timeline is still playing out. They won't want to provoke a large market reaction. So again, a kind of knee jerk reaction there, I think the market will end up fading. You point out you're a sterling mirror. I know you've been a bit reluctant for me to talk about the voodoo technicals on the charts, but it is a pretty key level around around 8620 that we've appeared to have modestly broken below. I think if we can make further headway, it starts to look interesting there from the downside from a squeeze of positioning perspective. But from a fair value perspective, if you do think the market calms down a little bit on the politics, fair value control, you know, steers sterling typically trades around one or two pens cheap when that happens and that puts you on an 84 handle. So we're constrictive sterling versus the low yielders, things like stocky Swiss euro. For no key, fair value on your no key is up at 1140 now. You know, there's, there's, you know, on the, on the simple models, there's a little bit of adjustment still still needed. Obviously oil has come down this week. That's been an issue. I think the dollar strength has been an issue for no key as well. Norge's pricing is, does have around 15 basis points in for August now. So there's a real chance of it over hike there. And if you think oil can stabilize, we can, you know, potentially, you know, normalize on some of the fair value metrics and we have inflation in a couple of weeks time, which could line up an August hike. There's potentially a picture there where no key can start to stabilize. We'd, we'd particularly look for that versus stocky, you know, as, as a, you know, to be spare specific. But yeah, it is notable that we've had an a no key under performance. And I'd say I think that's, that's oil and dollar driven. For Swiss, it's interesting how the debatement trade or lack of debatement trade has kind of gathered pace. Gold prices come off, you know, that you're thinking about orthodoxy and the fared and what that does to the debatement trade. And I think, you know, you look at some of the typical drivers for Euro Swiss, Swiss being alternative alternative reserve asset. As oil has come off, you look at the copper gold ratio is now implying Euro Swiss around 95. So I think that that adds to some of the weights on on Swiss. I'm a bit concerned by what I saw in the QMI data in and what we mentioned before for for stocky in terms of impact on Swiss, but we are, you know, preferring the funding in Swiss to on a global basis, you know, versus currencies like Aussie, dollars are half rather than European specific, which I think can, can hedge out some of that European growth risk. And as you say, mirror, a lower oil price could mean there's a trade off in growth over the short term where oil is, is able to help out Europe a bit over the next couple of months. Okay, thanks a lot, James and I'm throwing some Boudreux technicals in there as well. But let's wrap it up there. We're taking quite a bit of time already. Thanks a lot for joining the spot cast. This communication is provided for information purposes only. These are for the 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 June 26, 2026.