Global FX: Post-CPI and pre-Fed FX round up

[MUSIC] >> Hello and welcome to JP Morgan's Add in E-Rate Podcast. I'm Mira Chandan, co-head of FFX Strategy at JP Morgan. Join today by my two colleagues, Patrick Locke and Octavia Pesky from G10FFX Strategy and then a Nash Guckers, so we're from EMFX Strategy and Nash Guckers. We didn't get a special request for you today, so I'm glad you could join. But look, we've had an event for a week and if I sound a bit downbeat, it's for a good reason. I think we've had a load of developments in the past couple of weeks. The Jackson Hole hawkish delivery, from Warsh, from Chair Warsh. We had the hot payroll sprint and then we've had the hot CPI print today. We've got energy prices at the highs and the dollar just won't strengthen. And for dollar bulls such as ourselves, that's quite a frustrating thing. But it's also kind of interesting in the sense that it's leading to a lot of introspection on our side, part of what we've been talking about in the debate corner. If so much is priced and already for the Fed and rates markets and if all central banks are hiking and growth is good everywhere, does the dollar really deserve to strengthen? And now that it's all in the price and the dollar still hasn't been rewarded, we've been making the argument that valuations are cheap. Then what is it really going to take for the dollar to strengthen here? It's been quite a conundrum in our mind, to be honest. So yeah, we are obviously sticking, well, we are sticking with the constructive stance on the dollar, particularly going into the FMC next week. And what I want to focus a bit on today for the topics, I really, what are the currencies that can withstand a fed hiking cycle? I think we've got north of three hikes almost for now, priced and for the Fed. What are the currencies that can actually withstand it? And before we do that, Pat, maybe we can get a rundown from you on the CPI and what the outlook is for the Fed next week. Yeah. Thanks, Mira. So some important developments, obviously, over the course of the last week, going back to NFK, which was pretty holistically strong, but going back to the worst checks and whole comments, he did kind of suggest that inflation really is the problem right now. So we knew coming into this week that CPI was ultimately going to be the determinant probably of what we get next week. You know, CPI was solid-ish. And then CPI today ended up beating on the core by a tick, looked at 29 basis points. Super core came in hot at like 51 basis points. That was the hottest since January. So there's definitely some upward pressure on the core services block, even though kind of like Brent and things like that were actually on the soft side. So yeah, I mean, it looks increasingly like next week is very much a possibility. As you kind of note, though, I think the conundrum for the dollar is it? I mean, it's more than a possibility, it's 90% price at this point. Yeah, exactly, right? It's, I don't know if I've ever seen the Fed not go when it's when it's that aggressive thing price. But so what's it going to take then, you know, really for the dollar, the major response in after the 830 data was directionally consistent and probably the magnitude as well in terms of what you would normally expect. But it's all all been given back the gap, you know, DXY, I've been tracking September F.O. and C pricing quite closely for some time. But even that's lagging now, so there's obviously a chasm here. And it's not entirely clear to me that even if they do deliver, which is basically just validating the pricing next week, that that necessarily will force the dollar to correct tires. So looking ahead to kind of a skew of risks, you know, I'd still like to think that if they deliver and if there's a sufficiently hawkish message that can, you know, take up terminal a little bit higher, dollar should still continue to get some kind of like traditional fundamental support in addition to the valuation tail end. But, you know, on the other hand, the 22 basis points now priced does set up a bit of kind of asymmetry in terms of a larger kind of like downside tail, if they just kind of like underdeliver in terms of hawkishness, you know, even if they do hike, if they just take less of a tone. So I think, yeah, I agree with you in terms of just kind of framing it for the dollar hasn't done a lot, despite a lot of good things being thrown at it. And now with 22 basis points, it gets harder, I think, in the next week. Yeah. And we have a couple other important center bank meetings next week, isn't it? That tactically, we think should be relevant for markets, because the third, we're, you know, obviously constructive on the dollar are going into it. We've got the B.O.E. I think sterling has a window of opportunity here. You actually do pretty well next week as well. It's one of the high yielders tends to be more insulated against, against rising U.S. yields. You've got the B.O.J., which should be interesting. You know, Yana is certainly one of the more when we've been tactically constructive on that. But again, we are getting to the point now where we need to see some actual delivery policy delivery here. So depending on what the levels are going into next week, there could be a risk of disappointment here as well. But for all three of those currencies with the central bank meetings next week, whether it's sterling the dollar or yen, we are actually tactically fairly constructive going into it. But let me move on now to, you know, sort of the main topic, which is, you know, what are the currencies that should be insulated against what looks like is going to be a fed hiking cycle. So I mean, I can kick off at the Euro and then maybe Octavia, I can hand over to you for some of the other European currencies. But on the Euro look, we had the ECB, it was hawkish, but, you know, obviously that was sabotage to a large extent by the rise in energy prices. The growth story in Europe has been fairly strong, but at the end of the day, if I look at a global ranking, the Euro is still fairly, you know, sort of lower end of the spectrum is absolutely not at the absolute lows, but certainly on the, on the lower end of the range, a spectrum as far as carry concerns. So it's a low yield there. I'm not particularly optimistic about the currency, it's really hard to be despite growth holding up so well. You've got a lot, you've got a lot to contend with. I mean, the biggest one to believe is energy prices, given its important status, and the second thing is that have been political developments and some noise around budgets in different countries as well. So, you know, and of course, the latest German state elections. So it's hard to be constructive over the medium term on that. So to me, I still prefer to use it as a funder. Obviously, we've been preferring, preferring some other lower, you know, yielding candidates in the Euroblock as a proxy for that stockies once such example, but I would say that my expectation is that Eurodollar should be, should be lower here, but now I've been saying that for a while. So I sound like a broken record. So acknowledging that completely, but Octavia, maybe we can turn to you within the DM Euroblock. What do you think are the most insulated currencies in your space to Fed heights? Hey, Mira, yeah, reviews on the Euroblock and more broadly have been pretty consistent with the Fed having a hiking bias. So the most insulated one on a hike would be Nokia and Sterling, there'd be the one we'd expect to outperform considering the rest of the low yielders would be hit more. And then that also means that tactically on a Fed skip, it would be stocky and Swiss that would get to benefit, but I'd make four points more broadly on on those currencies. The first is that on stocky, we've been bearish with high conviction due to the global yield and carry environment. We're conscious of the better domestic data and cheap valuations on some metrics, but we've been downplaying these due to stocky sensitivity to US yields and that's still very much the case. Second, on the other hand, we're structurally bullish Nokia. We think it's a turnaround story as it's undergoing a structural shift being a high yield or now within G10, which means two things, most of all, firstly, that a premium to fair value is justified because historically, high-carry has resulted in Nokia trading rich and the converse has been true when it's been a low yielder and most cheap at the time. And the second is that it's become less sensitive to energy price declines than it done back when it was a low yielder. As you know, it's harder to short a high yielder when energy goes down. And sure, it's still a near-term risk, but that would, if anything, provide an opportunity for Nokia. So we still think Nokia can strengthen further from here. It has solid carry, the terms of trade support, the strong fiscal position. Soki also has that strong fiscal position, but it's really the relative yield that stands in a part here. And then my third point is that on Swedish we still remain bearish. It's the lowest yielder of the mall and pressured both by yields and then also by better European growth there. And lastly, on sterling, so like you mentioned, it's a high yielder and then also an oil importer within G10, but it's more insulated than other importers in the Euroblock because of its higher yield. And even though medium-term, we may have the focus on fiscal pickup around the October budget, into the BOE, we do think risks are tactically bullish given the strong data and that it's been running above BOE forecasts into the meeting. And it's a high yielder within G10, so it should net net benefit relative to a currency like Euro and stocky from this kind of environment and be one of the most resilient to high-fed yields. Okay. Thanks a lot, Octavia, for that. And that's fairly consistent, I think, with our broader view in DM within the other their high beta currency as well. So for example, Ozzy is the other high yielder that's been one of our, you know, favored sort of expressions of this, this carry theme. And it's got the right way terms of trade exposure. We've actually, our economists have just penciled in another hike for the RBAs. And now it's going to yield 4.6%. Actually, the market is pricing in more than that. And so the gap in yields between the DM high yielders, like Ozzy and, and not key, both of which have pretty decent fiscal positions. And I'm both a commodity exporters versus the low yielders, like Swiss francs, for example, or even again, even though, you know, we are constructive. And yeah, I mean, the gap is just sort of continuing to grow pretty solidly. So those are still pretty good, pretty good candidates in our view. And of course, Patrick's been pointing out that can use as a funder, both, both within the DM space. But also, you know, also versus EM Latam, Max, for example, has been in a pretty interesting pairing there as well. And that's something that we've been working on with our EM strategist as well. But speaking, speaking of EM and Ashka, maybe I should turn it to you, obviously, you know, this, this, uh, movement rates is obviously been something that's still in the show, the movement commodities and effects, at least in my mind, has been a bit of a slideshow in comparison to the magnitude of these moves. What are you thinking from here and which currencies do you think are the best candidates to consider that might be insulated from this bad hiking cycle? Yeah, so effects has been a little bit of a slideshow, but actually a very interesting slideshow, because when we look at GBIEM returns, which is our main index for local markets, effects gains have actually been sufficient enough to make the overall index in positive numbers despite the bone cello, which I think it's quite remarkable. When you talk to the start of, you know, Doha not gaining on the recent developments, well, we have been bullish EM effects, we have been constructed. But even, and it's actually also surprising how well EM effects has done considering the challenges. So even approaching it from a bullish perspective, I must say I'm a little bit surprised by the resilience we are seeing from the start of due to our older usual drivers that we've put monitor for EM, US real yields, all prices, not got prices, all have been challenging and yet the GBIEM effects photo return has been very decent over the summer and even very recently. So I think the resilience has come through, we have expected it, but I think even compared to the expectations, it's surprising a bit to the upside. Now in terms of what's most resilient few, if had hike, obviously we would rank it from currencies that have the highest carry protection, that would be very standard. So we have the usual candidates there on the immediate reaction, we are, for instance, should so it's the absolute normal. Guangbin, Pesso, Brazilian reality, these are the usual kind of high carry candidates. I would also mention that several others clean in that category for other reasons. So for instance, Mexico does not have very high carry, but we also see that the positioning continues to be quite low and the kind of fundamental BOP sports quite high. So I would put that in the resilient category too. In this region, another one that stands out to me is Hungarian foreign, where we are finally seeing signs that the central bank is a bit more concerned about the FX behavior. We saw that on some of the, on the days of where a foreign was showing higher beta to nut gas prices, it looks like it's starting to trigger some reaction function and for that reason I also think although it does not have the highest carry out there, that the resilience should come through. On the other hand, on the other end of the spectrum, two currencies could, for me, stand out in a lot of anemia EMF as having recently shown more sensitivity to the yesterday's reprising and that is Shekel and Chellian Pesto. In both cases, I would say we probably see for the reaction if there is focus reprising. Having said that, you know, if there is so much price for the Fed, this could also be the ones that show highest beta to the opposite direction too. Fair enough and this is one good way to end it. I mean, I was throwing to somebody else earlier this week who happens to be a dollar bear and of course, I've been on the more dollar bullish camp and the net result has been that neither of us are actually happy here. So that tells you everything you need to know on the dollar but the carry is certainly one thing that I think continues to deliver and if anything, this high inflation, high growth environment is something that sort of keeps that in play for the foreseeable future. So we look stop there. Take a look at our publication for more details. 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. 2016 JP Morgan Chase and Company all right, preserved. This episode was recorded on step 11, 2026.