Global FX: Payrolls postmortem, ECB/ BoC watch, euro roundup

(upbeat music) - Hello and welcome to JP Morgan's Attenewade podcast. I'm Mirah Chandan, go ahead of FFX Strategy, JP Morgan, and I'm joined today by Senior FFX Strategist, Patrick Locke and James Nalligan, Patrick from New York, James from London. So, you know, as always, we do have quite a few new things to discuss, but I think the overarching team here is that the underlying FFX narrative hasn't really changed here. There are two main themes on my mind that I'm squarely focused on. The first one, I would say the macro landscape is still showing decent growth signals. It's showing that we're recovering, following the heat that we got from the US and UN conflict initially, but on the same side, we are seeing that inflation is firming globally, and that is a trend that is continuing after, even in the months that have sort of come after the conflict. So that's not a trend that's reversing. This overall should be supportive of carry, in particular, it should be supportive of high-yielding cyclical currencies. These currencies should be doing pretty well, and I do think personally, payrolls should be furthering the smooth and the search for carry overall. And the second team that I think hasn't really changed, and in fact has intensified is this US exceptionalism narrative that we've been sort of pushing. You know, it's still very much at the forefront. It was evident in the survey data like PMIs and the growth forecast revisions in the relative equity market performance, the US real yield increases, and I think again, being forced by the decent payroll number as well. And I think the dollar is actually under shooting on quite a few of these metrics, and for that reason, still constructive on the dollar, very much opposite of what we think about the Euro, even though we're going into what could be a hawkish ECB meeting. So a few things to unpack here, but that's certainly the broad sort of brush theme that follows FX is concerned. But let's maybe start with payrolls, Patrick. Can you just unpack the release that we've just had and how you're thinking about it in terms of the dollar? - Yeah, I mean, it was pretty much as strong as one could have reasonably expected today. Private beat headline was pretty high with government job creation quite strong. And maybe for me, the most important was actually the net revision of 92K on the two month look back, which we knew the last couple of months of data been pretty decent. But now with the revision, it starts to make it look like the three month trend is really actually starting to inflect i.e. it's looking like more of a cyclical turn. That definitely matters, and it looks like something that may have legs. So in that respect, it felt very much like an important print today and the dollars responding accordingly. And I would just add that the way we framed it kind of coming into this, I thought there was a lot riding on this personally. You mentioned one, the market's perceptions of US exceptionalism. Obviously it wouldn't have taken much to see kind of a soft print deflate the enthusiasm around US exceptionalism in a game. And like, for example, like 20K, right? You just say, all the labor market data last couple of months has just been kind of like noise with it without much of a trend. We're kind of putting that to bed now feels like that matters. And then second, you know, like, it's hard not to consider this release in the context of the the FOMC meeting in two weeks, which is chairworshes first. I think reasonably we're not expecting them to be like, I wouldn't expect the dollar to be raging into the FOMC because it's super hawkish. But this to me, at the very least feels like it removes some downside risks to the dollar from any kind of, you know, a dovish interpretation of the lay market data. It does seem to be more obviously inflecting higher. And so when you consider the US exceptionalism angle, the FOMC angle, I definitely, I definitely feel this kind of reinforces, you know, the dollar's prospects here and now. Going forward, I think what I'd like to see from payrolls to really kind of like help carry the dollar higher would maybe be more of a turn up in earnings. Earnings came back at three tents today after a couple of months and two tents, which is quite low. The over a year ago is still below three five, which is low. And our economists are noting that, you know, on a run rate basis for this year, basically, we're still seeing negative real income given kind of the high degree of headline inflation. So I think really for the, I think for the dollar to get more excited on payrolls data going forward, you'll want to see job demand increasing, but also in a way that puts upward pressure on wages that keeps kind of like inflation question marks floating, especially given kind of the lack of pricing and kind of the Fed strip for 2027. But, you know, bottom line, this is positive for the dollar, reinforces US exceptionalism and probably takes out any kind of like dovish linked downside risks of the dollar for the time being. Yeah, it does lead to the question, I suppose, as to why some of these dollar undershoot are persisting. And I do think that, you know, uncertainty around a varsha's reaction function is probably one factor that's really constraining markets from fully embracing this US exceptionalism narrative. I suppose there's also the issue of the US around conflict resolution, which can give you a knee jerk, you know, move lower in the dollar if it were to come out. But, okay, let's, let's move on. We also have central bank meetings next week. Let's talk about Europe for a few minutes. On the ECB for what it's worth, you know, we are looking for a 25 basis point hike. The question is really, what is the message that's gonna be sent, you know, in the presser and in the balance of risks, et cetera. And I think there, you know, the thing to keep in mind is that growth is pretty much more or less tracking with ECB's forecast. It's inflation that's that's firmer than expected. And, you know, Gregg's, you know, Gregg's is easy, our economist is basically of the opinion that we get one hike in June, a second one in September, and then we're done, but that the risks are actually skewed for a third hike. And in fact, one of the points that he's making is that we should be getting an implicit validation of three hikes from the ECB, even though Lagarde will very much be emphasizing the meeting by meeting data dependent approach. So in a nutshell, I think the meeting's got a field quite hawkish, and that, you know, obviously, the market is well priced to even three hikes, I would say we've got about 68 basis points of hike priced until the end of 2026. So that gets you to nearly three or quarterly cadence, but certainly if the message is hawkish, one can see how the euro might get a bit of a bit from that. My personal bias is to fade that. I think euro should be sitting squarely in the funders bucket, where even with these hikes, it's going to be a low yielder. It's really end up performing on a variety of metrics at ranks on the bottom end of the spectrum across currencies, whether that's Jones of Trade, whether that's yields, whether that's growth, whether that's equity market performance. So yeah, I mean, the market I think could be coaxed into a bit of a mini sort of euro bullish narrative on ECB hikes, but I think given that this isn't inflation, driven change in view, and hawkish bias, driven by inflation, very much in contrast to what might happen at the Fed, I think the upside on euro is actually going to be quite limited. So I would be fading any sort of hawkish signals that we might get on the ECB in case it transfers into a more positive outcome on the currency. To me, euro is very much in the funder category. But with that, James, maybe you can talk a bit about how you're thinking about European FX going into next week. Yeah, thanks, Mira. You know, your discussion there of kind of some kind of implicit validation of three hikes from the ECB next week, you know, I think it's important to think about where other central banks in Europe can kind of match or not match that. I mean, the Rix Bank really stands out to me as it's having a very hard time in getting anywhere near, keeping up with the ECB, given the kind of relative disinflation issue that they have. You know, Swedish core inflation at 0.5 euro zone core inflation at 2.5, just completely different ball parks. You've had it, you know, apart from the most recent print, you've had a string of inflation undershutes in Sweden. It's now ranking at the bottom of our G10 inflation momentum metrics ranking. And you've got the Euro stocky rate spread at the highs, you know, heading into the meeting next week. So, you know, I think I'd be looking towards stocky as a currency that could underperform on any kind of hawkish ECB next week. And also, I think, you know, off the back of what Patrick said about the kind of unambiguously strong payrolls print, I think, you know, Euro stocky as a pair, you know, has more exposure to, you know, if we were to see more violent dollar strength of some kind as the Fed, as the Fed, as people were reconsidered the Fed. So, yeah, I mean, we've been bearish stocky. We've been looking at it as a funding currency, you know, particularly since the Iran conflict broke out, but I think there are. You know a few additional drivers coming into play here, which could Make the weakness a little bit more pronounced. I guess the risk to all this is if you do see the M.O.F in Japan Come in and intervene to strengthen the yen We've seen before that can that can often help the funding currencies out in sympathy as it did at the end of April But then there's enough on the table elsewhere to To think about stocky weakness For not key, you know, think look just looking after the payrolls print today We've seen it weakening with a bit of weakness in the high yielders and From a short-term valuation perspective that's not a huge surprise because your or not key is actually trading a bit a bit cheap Fair values back up are kind of 11/12 so You know some kind of catch back up there's not not a huge surprise but we have been noting that In some sense, it's the level of carry that can matter not just the direction of rates spreads and so I think you You know once the dust settles on this You can see investors start to to fade the move particularly on RV in some of the high yielders So as you were saying there it's still a growth positive backdrop Whether high yielders should be rewarded really so not too worried about not key and then just lastly on sterling I think particularly encouraging today after as as that high yield weakness in G10 as Happened post the paywalls print sterling is actually held up very very well in the face of all that and I think that does speak to positioning There's there there's been a debate more recently among investors as to how short the market is of sterling Whether some of that has been taken back And and maybe maybe positions closer to neutral. We've been pushing back on that and saying you know We do think the markets particularly on some of our options data that that Patrick's been looking at The market does look still short stilling I think the price action today is very much testament to that that you know as the high yielders have sold off Sterling's held up very well and I think you're still in that world of you know political headline law You know carry in favor and I Just struggle to kind of paint this and paint the tail risk political scenario for sterling You know, I think that if if reform do Do well in the make field vote then you're thinking about maybe You know that they're being in some uncertainty as to who the labor candidate is but with the climb down from Burnham that we saw A few weeks ago on the fiscal rules I think that that kind of softens some of the tail risk so we've held a kind of bullish bias in sterling and we're still we're still of that mindset Yeah, we're gonna have a lot to talk about on the June 12th podcast for sure given how heavy the other week is but I I do generally agree with the thematic that That payrolls reported a should be reinforcing the high yielding Cyclical exposure rather than having these currencies under perform so I think once the last settles that these are still going to be the currencies that That should be the ones that that are leading the way Let's and yeah, you're right about Japan by the way I mean we are sort of in the intervention zone. So I think that's gonna be one place to watch out for To see if there is a more intervention at some point with all of you and reaching 160 And I do think you know that our our bias basically Continuous to be there that on the on a cross-end basis Yen should still be an underperforming here are given given when how low yields are both in a real and a nominal basis So still like the high yielders versus versus the yen story even though we might see he comes along the way from this intervention Side of things but Patrick maybe we can move to you on Bank of Canada now. We also got the Bank of Canada next week We have been using cat as a funder how are the risks that evolving around that data was pretty good today Yeah, that's right. We're all Yeah, so coming into this morning we were thinking that you know Probably small dovish risks to cat around bank Canada next week You know they've had some interesting commentary and recent meetings talking, you know Potential hike scenarios, but also uniquely talking about potential cuts scenarios if for example Terrace were increased on Canada or the USMCA renegotiations weren't going well That's that's kind of like a Canada specific dovish development But I think really is testament to just kind of the weakness in Canada more broadly and also the structural issues that are still kind of Plagging both the currency and the economy so those issues for me still stand obviously as you kind of suggest You know, there wasn't just US payrolls that were good today. It was North American payrolls really Canada printed North of 80k the unemployment rate dropped a couple ticks You know, I kind of see that probably as some payback for a couple months of weakness there There's still some kind of odd oddities in the data if you would Wages on an over a year ago basis dropped like 1.4 percent, which is a historical anomaly So a bit odd, but you know, I'm not I won't write off the data kind of like entirely, but so the question that me comes does today's labor market data Obviously change the tune of the bank Canada next week, and I think the answer for me is no again, the trend of cyclical weakness is entrenched the six-month sum of Adline jobs growth is actually negative. So even despite the strength today, they still lost jobs or last six months Core inflation there is still hovering around the 2 percent target Slack in the economies Just that it can absorb any kind of spill over from the energy price shock into headline And of course, you know the USMCA Timeline moves large With kind of the July first date coming up I don't think any of that is sufficient for the VOC to come out demonstrably hawkish So realistically, I think they'll just kind of like try and hit it down the fairway Probably again like slight maybe dovish skew especially even more rates pricing is right now But I don't expect them to be hawkish next week Okay, thanks a lot Patrick. I think we can bring that to an end here Thank you very much business for joining us today This communication is provided for information purposes only these 40 JP Morgan research reports really To its content for more information including important disclosures 2026 JP Morgan Chase and company all rights reserved this episode was recorded on June 5th, 2026