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

Meera Chandan (0:03)

Hello, and welcome to JPMorgan's At Any Rate podcast. I'm Meera Chandan, Co-Head of FX Strategy at JPMorgan. Joined today by my two colleagues, Patrick Locke and Octavia Popescu from G10 FX Strategy, and then Anezka Christovova from EM FX Strategy. Anezka, we did get a special request for you today, so I'm glad you could join. But look, we've had an eventful 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 payrolls print, 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.

For dollar bulls such as ourselves, that's quite a frustrating thing, but it's also 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 in 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 gonna 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 FOMC next week. And what I want to focus a bit on today for the topics are really, what are the currencies that can withstand a Fed hiking cycle? I think we've got north of three hikes, almost four now priced in for the Fed. What are the currencies that can actually withstand it? But 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.

Patrick Locke (1:57)

Yeah, thanks Meera. So some important developments obviously over the course of the last week, going back to NFT, which was pretty holistically strong. But going back to the war, Jackson Hull 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 kind of 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. Supercore came in hot at like 51 basis points. That was the hottest since January. So there's definitely some, a bit of upward pressure on kind of 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 that it hasn't...

Meera Chandan (2:56)

I mean, it's more than a possibility. It's 90% price at this point.

Patrick Locke (3:02)

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? The 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 been given back. The gap, you know, DXY had been tracking September FOMC 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 hires. So looking ahead to kind of the 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, dollars should still continue to get some kind of like traditional fundamental support in addition to the valuation tailwind.

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 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.