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

0:00Hello and welcome to JP Morgan's ad and you're eight podcasts. I'm Mirah Chandan, co-head of FFX Strategy, JP Morgan. Join today by my two colleagues, Patrick Locke and Octavio Pesky from G10FX Strategy and then a Nash Guckers, so over from EMFX Strategy and Nash Gucka, 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, Hawkes Delivery, you know, 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 you know, 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 leaning 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 already for the Fed and rates markets and if all central banks

1:04are hiking and growth is good everywhere, does the dollar really deserve to strengthen? And now that it's all in the price, you know, and the dollar still hasn't mean 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 quite, it's been quite a conundrum in our mind to be honest. So yeah, we're 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 in 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 war, checks and

2:08whole 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, PPI 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 that aggressive in price. But so what's it going to take then, you know, really for the dollar?

3:11The knee jerk 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 had 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 higher. 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.

4:13If they just kind of like under deliver 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 obviously constructive on the dollar 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 rising US yields. You've got the B.O.J., which should be interesting. You know, Yannis 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

5:16delivery 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 Yann, we are actually tactically fairly constructive going into it. But let me move on now to the main topic, which is 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 with 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 obviously that was sabotaged 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 lower end of the range,

6:16a spectrum as far as car is concerned. 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 to contend with. I mean, the biggest one to build 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 some other lower yielding candidates in the Euro block as a proxy for that stockies once such example. But I would say that my expectation is that your dollar should be lower here. But now I've been staying 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 Euro block. What do you think are the most insulated currencies in your space to Fed Heights?

7:20Hey, Mira. Yeah, reviews on the Euro block 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 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. A 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

8:23carry has resulted in an occupying rich. And the converse has been true when it's been a low yielder and was 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 have anything provided 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 model 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

9:25budget. 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 with in 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-fit yields. Okay, thanks a lot, Octavia, for that. And that's fairly consistent, I think, with our broader view in DM within the other high beta currency as well. So for example, Aussie is the other high yielder that's been one of our favorite expressions of this carry theme. It's got the right weight, terms of trade exposure. We actually, our economists have just been sold in another hike for the RBAs and now it's going to yield 4.6 percent, actually the market is pricing in more than that. And so the gap in yields between the DM high yielders like Aussie and Nokia, both of which

10:26have pretty decent fiscal positions and I'm both a commodity exporters versus the low yielders like Swiss franc, for example, or even again, even though we are constructive. Again, the gap is just sort of continuing to grow pretty solidly. So those are still pretty good candidates in our view. And of course Patrick's been pointing out that CAD uses the fund both within the DM space but also versus EM, Latin, MEX, for example, has been a pretty interesting pairing there as well. And that's something that we've been working on with our EM strategist as well. Speaking of EM, Aneshika, maybe I should turn it to you. Obviously, this movement rate is obviously been something that's still in the show, the movement commodities and FX, at least in my mind, has been a bit of a slideshow and combatting them 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 bed hiking cycle?

11:30Yes, so FX 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, FX gains have actually been sufficient enough to make the overall index in positive numbers despite the bone cello, which I think is quite remarkable. When you talk to the start of, you know, do or not gaining on the recent developments, well, we have been bullish EM FX, we have been constructive, but even, and it's actually also surprising how well EM FX 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 July, all the usual drivers that we would monitor for EM, US real yields, all prices, not got prices, all have been challenging and

12:36yet the GBIEM FX 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, a Fed 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, Lyra, for instance, should say it's the absolute normal. Juan Bienpeth, so Brazilian reality is the usual kind of high carry candidates. I would also mention that several others are cleaning 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.

13:39In this region, another one that stands out to me is Hungarian Forens, 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 days 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 a shackle and Chilean festival. In both cases, I would say we probably see for the reaction if there is focus reprising. Having said that, if there is so much price for the Fed, this could also be the ones that show highest beta to the opposite direction too.

14:40Fair enough. And this is one good way to end it. 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 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.