Global FX: US diesel ban, dollar view, G10 central banks

Meera Chandan (0:03)

Hello, and welcome to JPMorgan's At Any Rate podcast. I'm Meera Chandan, Co-Head of FX Strategy, and I'm joined today by my global colleagues, Octavia Popescu, Patrick Locke, and Anezka Christovova, former to DM and the latter from EM side of things. We've got quite a few things to talk about. I mean, the dollar is finally breaking higher, so we'll get to that in a second. And I think even though we feel gratified and sort of validated with a more constructive stance on the dollar, I would say in the grand scheme of things, the actual outcomes and the actual moves are still underwhelming if you were to look at it from a cross-asset standpoint. So that's one thing to unpack that we'll do. We also have the DM Central Bank meetings this week. Octavia, we're going to talk about that as well and takeaways for currencies. But what we'll start with really is this potential US diesel ban that is being sort of discussed. And I was in the news recently. And Anezka, maybe you and I can have a quick chat on that, focused on DM and EM respectively. But maybe we dive right into it, starting from that last topic on the diesel ban. Now, from my perspective, just to set the global stage here, this has the potential to be meaningful. If I look at what has driven really currency returns to date, it's been about carry, of course. But if I dig deeper, it's been informed by the relative terms of trade moves, so the energy price story, which include products, and then also the relative growth story, which is supposed to at least reflect some of these terms of trade impact. And if I look at the market impact on the day that this news first came out for currencies, what we did find is that the most vulnerable currencies did end up moving, which is actually what I'm finding is a lot of them are in the EM space, so it's good to have Anezka on. But the starting point, of course, one can have like various starting points here, but the immediate starting point, if I look at the immediate diesel dependencies on the US specifically, that could be one factor that we should be concerned about and be focusing on, and then also what's the stockpile buffer of diesel that you have. And that's probably the simplest sort of starting point to approach this. And if I look at that first order ranking of currencies on that basis, the takeaway is actually pretty clear. In DEM, what we're finding is the most exposed country is actually the UK.

It's got low storage as well, and then it's followed by the Eurozone. But then if I zoom that out and I include EM in the picture, and take a global look at things, it's actually Latam and then Chile stands out on some of the metrics. I'm looking at things like Mexico, RG, copy, even Brazil stands out as well. So that's sort of the starting point. But the issue that Anezka and I have been discussing as well is, is this really a fair way to look at it? Because there could be several mitigating factors. Well, firstly, we don't have all the details yet. How long can the ban reasonably last is one such factor. And our commodity strategists are noting that within a month, we could get to a fairly oversupplied situation in the US, given capacity constraints on transportation.

So, does this actually, logically, is this really the right approach for the US?

And could it therefore result in changes down the road? And then, there are also secondary currency level issues. Like for sterling, for example, they could curtail their own exports of diesel to alleviate some of the pressure here.

And the question we've been really asking ourselves is, if other signals on the currency are pretty good, on growth, on carry, et cetera, does it really matter if 5% of your total fuel consumption is temporarily disrupted if you can have these other mitigating factors? So does this really warrant a wholesale change in what, if you have a constructive yield sterling, does that actually wholesale change that? And there's no doubt that this is an incrementally adding up more for dollar sterling, but I'm just not so sure this will break the camel's back. So a long-winded way to say like on sterling, it feels very much like maybe this is too little an issue, but Anezka, since really in the global scheme of things, Latam is most affected. What are the factors you're considering and what is your approach to this issue?

Anezka Christovova (4:28)

Yes, as you correctly said, several of the Latam currencies that we cover import a large share of their overall product or diesel consumption from the US.