Global FX: unpacking CPI, euro bloc divergence, CNH resistance

Meera Chandan (0:03)

Hello, everybody, and welcome to JPMorgan's At Any Rate podcast. This is Meera Chandan, Co-Head of FX Strategy, JPMorgan, joined today by the other co-head, Arindam Sandilya, all the way from Singapore. And then, of course, we have Senior FX Strategists, Patrick Locke and James Nelligan on the call as well. So another week, a lot to unpack, and actually FX is finally generating some interesting moves. So definitely giving a bit more traction to some of the views that we've held on to quite a while. But following the Blockbuster Payrolls Report, obviously from last week, we now also had a pretty hot inflation report as well. We need to unpack that, so we'll go to Patrick later for that. Last week, we noted how US equities would behave would be quite important on a look ahead basis. It wasn't our base case that the route would continue in tech stocks. But we were concerned that as we were heading into year end period that this could potentially become a problem. It doesn't look like it's extending. Things look a bit calmer.

That's good for now, but certainly it's something that we still very often keeping an eye on because it does impact the dimensions of US exceptionalism, which is relevant for the dollar. It's relevant for carry and cyclical currencies more broadly. But the good news is that this week things have been a bit more calmer.

Then we've had several other moving parts as well, the oil price collapse, which has basically happened earlier in November. So that's obviously been making people a lot more wary on the dollar because that would not normally be a dollar better as the US is a net exporter. But clearly with a lot of this, we do have a lot of noise on the macro landscape, if you will. And as you know, on the spot, the JPMorgan team does endeavor to cut through the noise and focus on the lasting signals for FX. For US, for currencies, for us, that has been firstly, US exceptionalism. And second is the resilient global growth story. Those two pillars, it looks like continue for now. And the data this week has absolutely reinforced the US exceptionalism view, and hence the constructive dollar view we've had so far. So we're sticking to that, even though we've already had decent moves so far, and some of the initial levels we had in mind have been met. Now, why is it that we're sticking to the view and what's the push? I think it's important to address the pushback, actually. We're getting quite a few pushbacks on this dollar view, and I'm just going to address four that I've been getting with high frequency, and I'm going to give you my come back on that, and then we'll go on to the rest of the team and discuss other parts of the world. Pushback number one for the dollar has been that it's already done a lot already. It's closer to being at fair value from certain metrics. My come back on that is yes, absolutely. I think from a valuation perspective, the dollar has done a fair bit of fair lifting, but it's actually still not fully reflecting the upturn in the domestic growth story that we've seen and certainly not on the inflation side as well. There's some valuation models on which it's still undershooting.

The second pushback we've had on the constructive dollar view is that oil is meant to decline. It's an oversupplied market. Certainly, our own analysts are saying that.

That's been the big view going into 2027 That's absolutely correct. My comeback there is that if you look at the relative sensitivity of the dollar, it's substantially larger to a rising Fed terminal. Particularly, when you compare that sensitivity to oil, what you find is that the dollar has actually not been that reactive to oil. The only time that was changed this year was briefly in the aftermath of the US Iran conflict, but that has subsided since. The third pushback I get is that the US equity's exceptionalism story is challenged. Agreed. Absolutely. This is the biggest risk in my mind on a forward-looking basis. It's not necessary. It's not our base case, as you know, but this is a risk we are quite vigilant on. I think we recognize that this is a story that has potential to change the US exceptionalism if it does get unruly. Again, not our base case, but the way we are hedging against that would be probably looking at some defensive currencies and looking for some cheap hedges, things like yen or Swiss franc actually offer some interesting opportunities there to hedge against such outcomes. Then finally, I do hear in terms of pushbacks also that the dollar should consolidate prior to the next payrolls, given that there's going to be a data vacuum, and we're not going to really see very much.