Global FX: US policy watch, euro/ CEE bloc lagging, NOK and GBP resilience

[MUSIC] >> Hello and welcome to JPMorgan's attendee rate podcast. I'm Ira Chandan, go ahead of FX strategy at JPMorgan. I joined today by three of my colleagues Patrick Locke, James Nalligan and Ashka Krista-Woa from New York and London and London respectively. I will have a bit of US flavor, DM and EM flavor today. Now, taking a step back, a slides note we've been talking about three themes on the currency side. The first one has been centered around pro cyclicality and carry, which obviously had a bit of a wobble as we saw the risk sentiments take a bit of a hit. But actually, in the last week or so, we've seen some sort of a reversion of that. And we have seen that FX carry baskets that it turns a lot of those have been recouped in the last few days. So actually, carry is still the best performing strategy you're today on certain metrics. The second theme we've been focused on is the funder rotation story. This idea that Euro should be used as a funder instead of some of these other currencies within the Euroblock like the Swiss franc, for example, was the most glaring example or stocky where the fiscal situation's better. The reason predominantly was that the OAT spread widening is still not reflected in the Euro. We think fair value of a Euro dollar given a few accounts for the fact that actually OAT spreads have widened quite a bit is much lower, closer to 106. Then where we are currently, obviously, we don't think it's going down all the way to 106. But it keeps us having a bit of a bearish bias. Anything the most prudent thing to do here for clients for investors is to actually be looking at a rotation of funders more towards the Euro. And then finally, we are retaining the long dollar bias. And obviously, this is no longer as high conviction as it was before the dollar had adjusted. Now, we've just got a bit of a bias around it because I think that is a lot priced and for the Fed already. And actually, some of the data out of the US has been actually quite conflicting. So it's not quite clear if the Fed actually needs to go at breakneck base here. So setting the stage with those three teams, I would say to me, the highest conviction out of all of those is actually the first two is the pro cyclical carry team and the funder rotation team which uses Euro as a funder and the reason. The reason for that is that growth in the grant scheme of things is still holding up okay. We are getting into earning season and the Fed keeping rates high for longer is sort of a universally global theme almost where where a lot of rates interest rates are high for longer. So carry still ends up being fairly attractive. So to me, the carry team actually means modern dollar funded carry, obviously not being, you know, it does not involve being better for the dollar under any circumstances. But pro cyclicality carry and Euro as a funder is sort of the high convictions, the dollar bias. I'm not super convicted on right now, purely because we do have a lot priced and for the Fed as I said. And obviously some of some of the data today sort of keeps the October hikes in play, but equally the payrolls report was soft. So let's see how that works out turns out. So with that, let me actually start with you Patrick. Maybe we can talk about the US developments. First, we had a decent amount of data come through and there's some policy issues that are also going to be in focus in the next two or three weeks. So can you just break those down for us? Yeah, sure. Thanks, Mira. So I think, look, regular listeners will recall that, you know, we were pretty bullish on the dollar August, September. But it kind of consolidated in the last couple of weeks as we started to show that, you know, data as you suggested was not quite as hot on some of these key tier one prints, like the last payrolls, for instance, Fed terminal, as you say, was looking pretty saturated there for a minute. So some of the momentum and the momentum behind some of the factors driving the dollar off trend of last couple of months looked to be kind of cooling. That plus Fed speakers or last couple of weeks, you know, really starting to talk more about less urgency, you know, tempered our enthusiasm around the dollar there. But, you know, my personal bias coming into this week was that maybe that got a little bit too far. So basically very little premium was left coming into this week for a hike in October overnight balls for the US CPI, I seemed particularly low, especially in the context of consensus headline six, 60 basis points for CPI this week. And low and behold, core beat pretty considerably, right, I think it was like 33 and a half basis points. There was a breath within that print as well, suggesting that unlike last month, it wasn't just obviously kind of like one sector driving the price spike. And so granted just for a few hours, you had a very strong kind of rates reaction in the dollar, I think correspondingly or commensurately rose with that. I thought that was generally all appropriate. And I think, you know, that was obviously the exclamation point of the week, but really I think the rest of the data from, you know, PPI, some of the surveys, et cetera, you know, continue to underscore that we're still in a pretty firm inflation environment here in the US three months, six month annualized run rates of course, super core are inflecting higher growth is running at 3.5% annualized here for the third quarter, I think our economists are talking about upside risks through the end of the year. So it's a pretty firm overall backdrop still and like, yes, the dollar sold off this week, because in part, you know, the yield spike didn't last given the equity stress and things like that and the dollar kind of like sold off alongside that along with maybe some deleverging, but the fundamental picture, I think for the US is so pretty solid and inflation, I don't think at the very least you keep the fact cautious and I think that will help keep, you know, something of a soft bit under the dollar here from in the in the near term, even if it doesn't kind of run away stronger. From us, but that's not, you know, the only kind of like policy stuff we're watching at the moment, either there's a particularly unusually elevated sensitivity, I think to this quarterly, we're funding in November, that whole process kicks off actually in a couple hours when the Treasury will distribute its dealer questionnaire around, you know, historically rates market participants use that to try and get a sense of potential changes. That will happen at the refunding next month, obviously, the markets on guard, given the changes in the buybacks announced in August and you'll recall that, you know, the dollar sold off pretty hard when that buyback was announced and it's interesting to when you look at actually the daily pattern of the X Y in the second half this year, it's very interesting to see that basically the two biggest dollar down episodes for one, the August refunding announcement with the buybacks. And then, I'm sorry, the August buyback announcement and then second was the end of July combined. Dovish F.O.M.C. and the FX intervention, so clearly, you know, policy remains pretty important here for the dollar as it relates to the Treasury decision, you know, we were flagging it more as a tactical risk, more so than anything strategic, we did ultimately fade dollar weakness back in August. And basically predicated on this idea that you're not really going to have longevity in the debatement trade, if the Fed is not really participating, and obviously the Fed is turned, you know, substantially more hawkish over the last three to six months, so we still think that's the case, but, you know, worth flagging just given empirically the dollar has responded pretty, pretty significantly to these things over the last couple of months. And then finally, you know, keeping an eye, of course, on midterm development, Democrats have some momentum betting markets are looking for more like a sweep or higher odds of a sweep. It remains the case that, you know, given that you'll have a Republican president with a veto power, we still think, you know, the ability to introduce legislation that could really move effects considerably, we think those odds are relatively low. And I would just say that like that's kind of the signal that we're getting from the ball market as well, there's very little premium priced in for the event itself. In fact, if you look at kind of the day waits in the midterms, it's actually below the day waits for CPI and NFP that follow right after that, so I think the market has a whole and recognizes that there's not a ton of policy implications that are going to basically directly affect the dollar from here, nevertheless, you know, politics and change and so we're keeping an eye on it. Thanks a lot, Patrick, that's pretty comprehensive, and frankly, when you talk about the data, it does, it does feel like US exceptionalism is very much still alive and kicking and that's that's certainly a, you know, quite interesting because it's not just about US equity, that performance, it's not just about the data in the US, but it's also about energy prices, you know, obviously, oil is staying fairly sticky and elevated and TTF gas is making new highs as we speak. So that is another sort of headwind against against the euro from where I stand, but you know, but let me turn it over to you, Nashka, recent developments making you change your mind on the top down story in EM or on in particular sectors is your conviction level changing at all. Thanks, Miara. Yeah. I would say the convection level is changing for me a little bit, the way I would characterize it is that when I think about the distribution of rules and outcomes, we have pretty reached a point where we need to kind of take away some of the positive tail and probably think about some of the negative tail. I don't think the median or the average expectation that I have has changed dramatically, but I do think that in my own mind, I had to downgrade some of the potential upside for growth and what worries me is that, first of all, we are seeing some of the acts of yields on other asset classes. So that will be the first sign you see that actually the tightening in monetary conditions is having some impact somewhere on expectations. I would be a bit more concerned about the consumer in some countries and another aspect that sends out to me that since the war in the Middle East started, we always had in our minds a little bit of a framework for all prices and at what moment should we be worried about growth. And I think for me, personally, 100-barrel for oil or brand has never been an issue in real terms. That's not very high. But when I woke back at the levels that we were saying, "Oh, these levels could start to have some impact." Talking about all prices in total cost including transportation, which based on our commodity team that was a really nice publication they did last week, we are here looking at 130-140 barrel, which I think is at the levels that we initially discussed would make us worry a bit more on growth. I wouldn't be in any sense dramatically negative either. I just don't want that to be the message. I think there is enough of non-interest rate sensitive sources of growth such as defense spending or AI. But it doesn't make an impression on me that let's say that JP Morgan for Constrivision index for EM has stagnated now for two months. So at least the upside, the string of upgrades to EM growth has stalled for now. Now I would acknowledge that just one way to think about it. I think the macro uncertainty has certainly increased. So I'm more thinking about it as a change in the distribution of outcomes. What that makes me is more cautious on the lower carry stories without an ideal thing or adding angle. So what we have done is narrowed the portfolio. I think that's reasonable at times of less macro uncertainty. So we focused the portfolio a bit more narrowly on the higher carry candidates and reduced positions in the lower carry less idealistic stories. If I mention in this environment, what still stands out, I would say some of the highest long carry exporters, energy exporters, will they sell the higher convection part of the spectrum, Brazil, Colombia, some of the higher carry candidates in the more liquid space. In EM, we feel very constructive on hunger actually. It's not the high carry candidate, but I would say the ideal syncratics are still very, very strong. Thanks, Anashka. Now that's quite interesting for two reasons actually because the first one being that if I look at the growth signals that we look at on our systematic side, actually, and they are partly based on the forecast revisions indices, they have neutralized, they were actually mostly in the green, they were leaning pro cyclical, you know, up to about a few weeks ago and now they've just neutral, not turning defensive yet, but just neutral. So very consistent with what you're seeing, obviously, we know for carry what ends up, you know, mattering is if yield is wide, wall is low and growth is doing okay, even if it's not going up, it can actually work and deliver positive returns. So I guess my carry thematic is still sort of based on that. And yeah, I mean, I think that's quite an interesting setup there. The second thing that I'll say is that even in our systematic models, what we're seeing is actually a lot of the Euro block and your high beta to the Euro, which is a lot of the currency you mentioned and CEE, for example, is on from a systematic standpoint actually screening as the lower end of the range for the global stack within the global FX stack. So if I do a cross sectional ranking, actually, a lot of the Euro block currencies are showing at the bottom of that list, which is furthering this idea of the Euro funded carry theme that we've been talking about. But thanks for that, Aneshka. James, let me now turn it to you. Obviously, you've had some interesting calls, you know, knockies being a main theme for us. You know, we've been very constructive on it. Swiss, we've had a change on and sterling, you've had an out of consensus, more constructive call as well. How's that depending on what are your thoughts in the area? Sure. Yeah. Thanks, Mira. I think, you know, what we saw this week, that, you know, Aneshka and yourself and Patrick picked up on in terms of the price action after the CPI print in the U.S., where yields are actually lower on a hot print due to the equity reaction is kind of goes back to what we were talking about with Swiss last week in terms of just hitting, testing some of those thresholds in terms of the impact on yields on on market implied growth. And what we've seen this week is Euro Swiss heading down to kind of the 92 50 area, which firstly is kind of more consistent with the historical beaters, what French friends are doing. But secondly, plays to that sense of market implied growth and where Swiss stands relative to that. So, you know, we're looking at things like the Eurozone macro recovery equity basket, the QMI data, which is, which is implying that the European PMI could potentially be four or five points to lower and that's the kind of adjustment I think we're seeing in Euro Swiss and this is about obviously markets trying to find out where restrictive is and what that means for different parts of the global economy. So we're still bullish Swiss after the switch last week in view, we do think that Euro Swiss can grind lower here. For Sterling, we did hear from Healey yesterday in the media confirming reports of the bank tax potentially bank search charge going up to 8%, you know, this had been speculated around before. So it's not brand new news. You know, our thoughts are that we're both improving in terms of revisions that the currency and the economy is more able to digest that those taxes. And so we're seeing you know, you're Sterling making new lows as we speak. I think that that tells you, you know, the market is pretty comfortable with the idea of a bank tax and the economy is able to digest it. Obviously, it will depend on delivery on the day in terms of policy makers doing what they've communicated. We did also get some encouraging GDP data out of the UK this week. We've been talking about UK macro resilience. I think that, you know, that still holds up as a theme for Sterling. And then Nokia, you know, Nokia's been an outperformer this week. Their value for your own Nokia is down at $10.50 now. Norge's bank pricing screens on the low side versus the rest of G10 in our view. And you just had, well, this is relative actually to the dooforks scores that we use. Norge's pricing's on the low end versus the rest of the G10 using that data. And then, obviously, TTF prices have been making new highs. That feeds into pricing itself. You have that valuation argument, you have the Eurofunder overtation that Mira's talking about, which has helped your Nokia lower. And we've seen a lot of resilience in Nokia to the risk asset weakness. I think that's due to, you know, the strong global and domestic growth backdrop itself. Also, we got the budget in Norway last week, not a major game changer. But at face value, you could be looking at $250 billion of purchases next year, sorry, with downside risk. It must be stressed from the assumptions around petroleum taxes, because you could have, you know, oil prices staying sticky for longer, which could actually end up mean. And that meaning in the Norge's bank have to buy foreign currency. But it's a bit too early for the currency to trade that. I don't know how you've given that what energy prices are doing here. But I'll leave it there, and thanks for joining. Thanks for listening this week. 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 Chasing Company, all rights reserved. This episode was recorded on October 16th, 2026.