Global FX: The beginning of the end?

[MUSIC PLAYING] Hello, and welcome to this edition of the At Any Rate FX Podcast. I am Arindam Sandhilia, and I'm joined today by James Nelligan to discuss the aftermath of what looks on paper like a liberation they ask about turning US strategy. As is widely known to all our listeners by now, we have entered into a two-week ceasefire period on the war in Iran, though the fragility of the truth was on full display immediately falling the news. Risk markets have been chomping at the bit to move on the war for a while now, with signs of increased desensitization to negative war news in the lead up to the ceasefire, followed by very large rallies across the board, after oil dropped 20% falling the news from the ancient week highs. So the heated debate that ensued internally amongst ourselves was just how durable this truth is likely to be. And whether markets can truly mark this week as the one where the war effectively got over for asset prices, at least in James, you may be a better military or a geopolitical strategist than I am, but I see no reason why anybody should listen to us, certainly me, on the first question on the shelf life of the truth. Nelligan objectively say is that the data shows, that betting market data shows, that odds of the dams winning both chambers of the Congress in the November midterms have risen sharply since the war began. So it is conceivable that this is where the administration's focus turns to next after having secured this hard earned truth. But I fully can see that US domestic political incentives is a very narrow lens to view the conflict through and there are other actors involved. And there's plenty of scope for disagreement on the 10 point terms of the ceasefire deal for this truth to break. But while we'll be passive watchers of the events on the ground, I do have some sympathy for where the second question that we were debating is coming from, which is the war over for financial markets. And I think that question is heavily informed by recent history. Essentially after having watched equity bottoms forming in the aftermath of COVID, after Russia, Ukraine, and after liberation day, either well before or at most, concurrent with a short circuiting trigger event. I think there's this learned Pavlovian response or particularly equity markets to put the past behind and move on. Even as fixed income markets tend to ponder on this proceeding risk of a bit longer, that's certainly been the pattern over the past week. No equity markets and credit markets are the most advanced in terms of retracing their peak to trough cell offs over the past month, whereas commodities are lagging. We can sort of understand why, because the supply outages in several commodity sectors, especially in oil and gas, are very real and will take time to heal. Rates are lagging because there has been this persistent upward shock to the inflation outlook, at least for 2026, which will change certain central bank monetary calculus in some parts of the world. NFX is sort of caught in between these two things and it's somewhere in mid-pack. So turning James, turning the discussion to you, just opening up the floor for your general thoughts about the ceasefire, what do you make of the price action that's followed? Any thoughts on the durability of the relief rally? Or wherever you want to take this really? And while you're at it, can you also touch upon a question that we've received frequently from clients in conversations, which is like us, several people were bullish on the dollar versus G10 energy borders through the conflict, but that theme sort of really did not work, did it? Except for the very early stages of the conflict, the dollar reaction, I'd say, our duty has been underwhelming. You had to neutralize that view, it was a tactical view at best, and we did utilize it after the ceasefire news made weak. So what do you make of that overall underwhelming element to the left tail bit for the dollar? Oh, yeah, thanks, Arrenda. Yeah, I just kind of repeat upfront that that bullish dollar view was kind of tactical in nature and more mentors are kind of short-term hedge type of view to conflict escalation rather than a more structural shift in view. I mean, let's not forget, prior to the Iran conflict, we were bearish on the dollar since, I think, March last year. And I think we can see a few of the themes that we were focused on back then lingering away in the background here. First of all, as you say, geopolitical, and so-called expert opinion was split on whether we would get ceasefire or an escalation, right up until that social media post from Trump, I think, on Tuesday evening or through the Asia session on Wednesday. But I think March, it's always kind of suspected a bit of a cave in moment from Trump. And that probably informed some of the equity price action that we saw. It was a lot more grinding in nature. And I think that translated over into some of the dollar pairs, particularly versus the higher beta currencies. Looking at the price action since the ceasefire announcement, I mean, you look at the likes of Nokia, on the weak Nokia's been a bit of an outperformer. So even though you've had oil prices falling considerable amount, Nokia's traded quite well, which I think tells you that risk premium is having a lot to say here in terms of how currencies are trading, not just terms of trade, beta. And I think it's a really interesting point you raise in Harinderman this debate in the macro community now about, can the market extrapolate the marginal recovery we've seen in activity in the strait of Hormuz? Again, in a similar manner to how you say in the pandemic, where the market was able to really be very forward looking and extrapolate that recovery. And that would obviously involve unwinding the stagflationary pricing that we've seen. But again, I think there's a bit of a hesitancy to do that as well, because as you say, you still have things like the nuclear issue on the table in the negotiations that could easily throw us back into a world where the strait of Hormuz is once again closed. So I think on net, it calls for a mildly bullish tint in the overall view. And that's what we've reverted to here in terms of-- we're thinking about views such as a bearish view on Neuroozzi, which has that mildly bullish tilt in view, acknowledging that there has been some material shift in the conflict probabilities. Another angle, I think, to consider for the dollar price action and the underwhelming left tail period, I think, is this creeping US equity under performance that we've been seeing over the last few weeks. And I think there's just very much goes back to one of the main topics of conversation before the conflict, which is whether long-term investors are going to consider the weight of dollars in their portfolios, their hedge ratios. And I think this conflict is just another episode that long-term investors can kind of feed into their correlation window of what is the right level of hedge ratio given the fact that the dollar isn't performing as well as risk markets suggest it should do. So I think that is lingering away in the background, and that might be another reason why maybe the dollar bid wasn't as sharp as it maybe should have been. But I think overall, it's quite interesting that markets have held on to these levels that we've seen post-the-cease fire news. And I think that is a little bit of optimism there that maybe the market is looking to extrapolate that improvement in the straight of all moves. So yeah, a lot of interesting things going on. Thanks for that, James. I also think that for the dollar question in particular, maybe there's also a tendency in markets to maybe over-interpret the dollar's energy dominance. I mean, if you just look at the empirical beta of the dollar to oil, yes, it's risen quite a bit from what it used to be. But it's not massive in the same way that it might be for an out and out sort of oil exporter. And then also, I feel like the 22 comparison for the dollar is definitely flawed. I mean, if that was the lens through which markets were forming their ex-anti-expectations for what the dollar was going to do, and it was turbocharged by Fedhikes and then the rest of the world joined in. And as we know, there is this global dollar-financed balance sheet effect that comes to boost the dollar when you're getting a synchronized tightening of financial conditions that certainly wasn't the case here as Governor Bailey himself said in that White House interview in a central bank or the cross-the-world have been doing. The intent has been to want to look through this shock even for people who were kind of stressing to anticipating a tightening of monetary conditions. So on the whole, I think that balance sheet be paid was absent. And if you look at real rate differentials as well, I mean, I don't think the spreads have changed too much in the dollar's favor. So all in all of them, we would have liked given our tactical stance for the dollar to overshoot a little bit. We didn't really get that. But be there as it may, I want to turn out to discuss. a little bit towards the main topic in my mind for this week, which is we will wait and watch for how long this relief rarely extends. But I think maybe a more useful discussion for listeners is where in FX have to be thinking that the effects of this war are going to be a little more longer lasting, a little more durable, even if the ceasefire holds. So for the dollar, for instance, my sense is medium term, the dollar comes out of this conflict net net worse than it was when it went in. So yes, you know, cyclically the feds been reprised higher and some of the terms of trade gains are real if oil settled, let's say, $19.95 a barrel, but those were also the reasons why the dollar rallied New York sum in March. So you could argue that some of this has been priced in orderly and isn't the real view mirror. I think the big questions are what lies ahead and from that perspective, you could say number one, fiscal concerns around the US budget outlook could re-emerge as the administration pivot is focused towards the midterms from here. I know there's an implicit sort of political call involved there, but the data point that we haven't had is that President Trump has proposed an F-127 budget that pencils in a 42% increase in defense spending, and that's offset very inadequately by proposed cuts to non-defense discretionary spending. When a second, we are getting a lot of questions and meetings around the risk of Gulf countries repatriation of US assets to fund their domestic defense and resilience programs and the related kind of disruption to the petrodollar recycling regime, the rise of petrol yuan as an alternative given the Iranian-Hormous toll regime. These are very heavy topics on which we are doing some more digging internally. It's entirely possible that the GCC flows in particular don't actually turn out to be a very big deal. At least on a flow basis given that there's not been a big marginal driver of the USB or B in recent years, but the interesting thing is that these questions don't exist on 27th of Feb. And then third, as you exactly mentioned, this relatively contained dollar trend through this episode will incentivize potential effects hedgers of equity portfolios outside the US to potentially raise the hedge ratio. So net net this knee-jerk risk of short squeeze don'twithstanding, I think there are more questions that the dollar faces today than it did a month or so back. In that same vein, I throw that question back to you for your block of currencies in Europe. Do you see similar, more medium-term, durable effects emerge out of this? Yeah, I mean, I definitely see scenarios where there are potential lasting impacts, kind of almost regardless of outcome. I mean, if you think about sterling, for example, I mean, that's where we've seen the largest moves in growth and inflation forecasts across G10, but in terms of the shift in our economist forecasts since the conflict broke out. But just thinking about it from a scenario perspective, I mean, if we were to escalate again, obviously that stagnationary impact would be exacerbated. But if, as you say, the cease-fire holds, there's this whole issue around UK politics now where is there an element of political continuity as the conflict goes on where it's less likely that you get a leadership challenge for PM Starmer if you have a conflict going on in the background for reasons of political continuity. And that's probably a driver of the odds of Starmer stepping down, having objectively come down in the betting markets. But obviously, for dealers' struck and the conflict fades away, there's more room there for Labour politicians to make a charge. And so I think that still keeps the May 7th local elections on the table in terms of a key event risk for sterling. And it's something that I think can mean sterling potentially lags the recovery in say, versus other high beta currencies. And that political continuity issue is something we've got our eyes on in terms of how valid the challenge may be there from some of the other candidates like Angela Rainer. And that's where you get into the more bearish, ill-risk scenarios for sterling. If you have an energy shock from the conflict, which is potentially going to push UK CPI up towards 4% and you have a pro-inflationary government policy mix potentially coming on board in the second half of the year on top of that, it's potentially a bit of a nasty mix. But that's one scenario that we're potentially thinking about. Other currencies in my space, I mean, you think about the Swiss franc, we did see what turned out to be a pretty meaningful shift in FX intervention guidance from the SMB at the March meeting. We did probably underestimate that at the time. But we did get intervention data this week, which showed SMB intervention on the scale of around 11 billion Swiss, which is reasonable. I mean, valuation adjusted. It was more than that. And perhaps comparable to some of the, at least, directionally to some of the intervention they were doing during the Russia-Ukraine conflict. But I think there's a horizon for that in terms of our view is that as the conflict steps down, the SMB may not be intervening as much if at all. And that potentially presents a bit of asymmetry for Swiss. I'm not sure you get the rally in Euro Swiss that people think on a full de-escalation because you have to reassess the other side of the distribution in terms of SMB intervention on that outcome. So that's a risk that were quite conscious of. I think for the Scandies, there's all sorts of things you can say about the conflict reinforcing the resilience and growth in Norway that we, there had been a theme before the conflict. If you look again at growth forecasts changes since the conflict Norway has been unchanged versus the rest of G10, which has been downgraded. So at least as far as JP Morgan forecasts go. And I spoke earlier on this podcast about the balance between terms of trade and risk premium for Nokia. You can say for stocky that there's a clear hit to growth from the energy and port of status. You've had some seasonality issues for stocky as well. And these are all kind of bottoms up factors that you can think about. But I think the overarching theme here is going to be what for the Scandies is going to be where the dollar falls out of this. If we do get this creeping US equity under performance continuing. If the FX Hedge ratio story comes back on the table, if the repatriation flow story comes back on the table, that's going to be important for the Scandie currencies. So I'm a bit hesitant to overplay some of the bottoms up factors when the big picture could be what does the dollar mean for Scandies? That's all for me on the European space. So back to you, Rindam, what do you make of turning towards Asia here, the YAN, CMY, and the rest of the region in Asia? Yeah, thanks James. So it Asia, I think the Delta and Views really comes from down under. So Ben Jarman thinks that in a while we're still constructive on the Aussie dollar at the margin. The Aussie's domestic underpinnings have been compromised to some extent because of the war and what the RBA has done through the war. So the RBA has already hyped for the second time in the cycle because of this coming spike in oil price inflation and this potentially one more coming, just as the economy is slowing. So this is kind of your classic hiking into a slowdown and that could compromise and also the financial conditions, domestic financial conditions, underpinnings of the Aussie story. The other parts of the industrial intact, I think the old commodity, the carry, the physical strength pieces are all in place. The domestic story looks a little more wobbly and in comparison New Zealand never benefited from these energy tailwinds to begin with and the RBA has been patient from the outset. So it's possible that if the ceasefire holds this knee-jerk pullback in Aussie kiwi that we've seen from around 122 or so can extend further that's number one. On the other two big ones in North Asia, Yen and CNY, actually the view from both Tokyo and Hong Kong is that the existing views are basically reinforced by what we've seen. So for the Yen, we've had rest of the world, central bank expectations being reprised, materially higher. We'll see what the B.O.J. does in April, but it's unlikely they'll do anything that upsets the current calculus of about one hike every six months. Hard to see the end benefit from that. The energy shock does worsen Japan's terms of trade on a durable basis, and then most importantly, it does reignite fiscal concerns in terms of how the government is going to keep managing the fallout of this energy shock, which is why we've seen a reconnection of long-end JGB yields versus C&N correlation in recent times. The intervention risks are very much there, and I think the morph should be quite pleased with how well Dali has held in below 160 through all of these negatives, but net net we don't see our basic relatively perishing and storyline changing much. Finally, on CNY, I think the China has emerged out of this entire conflict as a relative winner. There's been a bit of a geopolitical halo that's been won as a result of presumably facilitating this ceasefire agreement according to news reports. Whether that leads to FII inflows that had fled Chinese markets since 2022 is kind of an open question, but it sort of opens up and upside on the balance of payment side that we didn't really encounter before the conflict. Also, exporters would have seen how well Dali CNY held below 7W, it didn't even knee jerk bounce to 695 plus through the conflict, and that would give them confidence as we know Chinese exporters set on a massive hold of unsold dollars, and that would give them confidence even though this period of large seasonal supply of dollars from corporates is over to keep at the margin chipping away at that dollar-horde, and net net, I think those forces should keep us relatively well entrenched on the policy and why track, even before considering these open questions about Petro-Yuan and CNY as an invoicing currency in global energy trade, etc. That's been doing the rounds in recent times. So at the margin, slightly less bullish on Aussie, similarly bearish on Yen and remaining constructive on CNY. So let's leave it there for this week. Thanks to all our listeners for tuning in. 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 10, 2026.