Global FX: Spilled OATs, Payrolls, Risks to carry

Meera Chandan (0:03)

Hello, and welcome to JPMorgan's At Any Rate podcast. I'm Meera Chandan, Go-Head of FX Strategy and JPMorgan, joined today by Senior FX Strategist James Nelligan and Patrick Locke from London and New York respectively. So we have quite a few things to talk about again this week. We've got the OED spreads that continue to widen out, and that's now finally showing some signs of spillover to FX. So far we've been saying that this has been mostly a centric move with FX, more of a sideshow. But for what it's worth, Euroswiss yesterday, even though it was down only like less than one and a half percent on the day, that did represent a pretty punchy five sigma move. So volatility just a pretty punchy for a cross like that.

Enough to catch attention when the primary generator of returns in FX all year has been carried. So if Swiss is a funder and delivers that kind of move, that obviously can morph into something quite relevant. And then for the dollar, I think is another thing to talk about because the dollar stenting has happened. We've been talking about how FX has been undershooting versus the move in rates, particularly on the Fed repricing. And now that we've hit our initial thresholds, what we had expected for the second half is just worthwhile revisiting where we stand on the whole dollar view.

So we'll talk about the dollar, we'll talk about euro, we'll talk about the Cadi and the pro-cyclical theme, all of them one by one. But Pat, maybe before we get into that discussion, can you just set the stage with payrolls and US data that we've just had this week?

Patrick Locke (1:38)

Yeah, thanks, Meera. So given everything that's been going on, both in the US and globally recently, in my head, ahead of payrolls, I was thinking about the distribution of outcomes. And I thought, barring our truly extraordinarily soft print, I thought the left-hand side tail was relatively constrained. So like if a weaker print wouldn't have that much dollar downside, given what has been pretty organic, solid US strength recently, and as you suggested, more percolating regional issues, also kind of like indirectly supporting the dollar. On the right-hand side though, given everything we've seen in global rates, kind of the more US leadership may be on the rate side, and dollar strength more broadly providing a degree of market stress. I kind of thought if we had a really high side print, so-called like 150 to 200, the U-rate coming down to kind of like 4039, strong wages, that that would pour a little bit of gasoline on the global kind of macro moves that we've had recently, and really see kind of like a big dollar extension. Obviously, the report itself kind of like manifested in that more of a left side tail.

I thought it was generally a pretty soft print.

So headline and private obviously missed, pretty decent negative revision 60K, taking out some of the momentum on a three month rolling basis that we had been observing. The participation rate, you know, climbed, it was pretty decent, hours worked was also good.

But that led, you know, obviously to an increase in the unemployment rate, which had been kind of on a seventh month downtrend effectively. So, interrupting that. And then the big one, I think, at the end of the day too, it probably goes under discussed is just, wage pressure continues to be very soft, both on kind of like a month over month basis and kind of on an over a year ago basis.

I think that holistically doesn't put like an entire amount of pressure on the Fed here. Or at least they can argue that there's probably not a lot of wage and services inflation being generated by the labor market. So not surprising to see kind of like how October FOMC repriced and how the dollar trade a little bit softer. But again, I wasn't expecting much of a dollar dump even if it was weak and that appears to be the case because at the end of the day, we're still tracking mid 3 percent GDP. We had GDP taken up for second quarter of this week consumption. Indicators continue to run strong, saving rate also revised higher, which takes a little bit of concern out of that.

Even though NFP was a little bit soft, PCE may be a little bit softer in expectations. The US story is still on pretty solid ground right now. Again, given this sentiment has turned a little bit more negative on some other regions over the last week or two. Dollar is in I think a decent spot here. Consolidation for the USD more so than a sell-off, I think is the appropriate response.