Global FX: Debate Corner

**Meera Chandan** (0:03)
Hello, and welcome to JPMorgan's At Any Rate podcast. I'm Meera Chandan, co-head of FX Strategy, JP. Morgan, joined by several people from the FX team today. Arindam Sandilya, co-head, joining from Singapore, Patrick Locke, James Nelligan, Octavia Popescu, FX Strategists from London and New York. So I've been out for a couple of weeks, and it turns out it was one of the most action-packed couple of weeks in FX with intervention and a bunch of other things, including the FOMC meeting. But I've come back, and three issues which are top of mind for me, but not necessarily the best resolution on it. And we've had a lot of internal debate, so we thought it's time to air this debate out more broadly and consider the various issues, the pros and cons. The three topics for us, the dollar, should you be bullish, neutral? The second one is the cyclical low-yielders and DM. As we know, DM is full of low-yielders. Are they due for a comeback? And the third topic, the Japanese yen, what is it going to take to stabilize it? And what should the view be here, given the historic actions we've seen?
And what we're going to do is basically spend a bit of time on each topic and try to give some sort of a conclusion here. But hopefully everybody will participate and this is going to be more of a debate corner.
So let's start with the dollar. Now this has been a hard call. Listeners will recall that we have been pretty constructive on the dollar since mid-May. It was a fairly out of consensus call back then. The view has worked, but it's been exhausting, the back and forth. And we've finally sort of pulled the plug in the sense that it reduced a bulk of the exposure last week. But we've still retained at the end of it a bullish bias in our forecast and a bullish sort of a partially constructive view through our view on carry, so through carry baskets, et cetera. But the debate continues. Now, the reason for why one should be neutral on the dollar is clear, obviously two out of three NFPs prior to the September FOMC meeting have disappointed for CPI softer, Fed Hikes are not eminent.
So why bother? What is the bullish case and is that a bearish case at all? So who wants to bite first?

**James Nelligan** (2:27)
Yeah, I can jump in. I think I probably lean a little bit more on the bullish side for the dollar. I think there's a few things to mention. I mean, the dollar is still cheap to get real yield spreads on our models.
I think for me, there's a bit too much focus on the next payrolls print, the next CPI print, the next Fed meeting. And I think it's worth zooming out for thinking about the totality of the data and what that tells you for where the economy is going, what's going on in the economy and the potential capital flows that could come on the back of that. So for me, I mean, when you're seeing data like the ISM manufacturing really, really accelerate, you're seeing new lows in jobless claims, that's telling you that there's some organic strength in the economy and whether that's showing up in, you know, the next key prints for the Fed is, you know, is, you know, hit here or there. And it could be, you know, it's more a case of over the next three or four months, that is probably going to show through in the key data that we look at. So if you look at things like the regional Fed surveys for payrolls or the NFIB survey hiring component, those are both suggesting that payrolls growth can accelerate, even though, you know, the last few prints have been a little bit kind of lackluster. And the drivers of the lower participation rate, if it's kind of boomers retiring or immigration, you know, those are labor supply issues, which could potentially be inflationary down the road. And ultimately, you know, if the Fed has eased six or seven times over the last two years, that's going to create some kind of acceleration that is adding on to a certain amount of structural inflation that was already there. So I think that's what kind of the stickiness in global yields is trying to tell us.
And you know, I think it's maybe hard to make a case that the dollar should should kind of boom stronger from here. But I think you can have a slow grind stronger in the dollar if the carry environment persists. And then and then just kind of at the tail end, you do have these these increased risks around Iran conflict with basically traffic through the straight back to the lows now, which I think is obviously a risk to energy prices that can help the dollar. And when I look at Europe, some of the growth leads have been turning over a bit. Our equity analysts look at the QMI data that they monitor as a cycle lead. And that's come down for a couple of months now. So for me, the balance of risk is more towards a stronger dollar, but it's probably going to be more of a grind.