Global FX: US policy watch, euro/ CEE bloc lagging, NOK and GBP resilience

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 three of my colleagues, Patrick Locke, James Nelligan, and Anezka Christovova from New York and London, and London respectively. We'll have a bit of US flavor, DM, and EM flavor today.

Now, taking a step back, as clients know, we've been talking about three themes on the currency side. The first one has been centered around pro-cyclicality and carry, which obviously had a bit of a wobble.

As we saw, risk sentiments take a bit of a hit, but actually, in the last week or so, we've seen some sort of a reversion of that.

We have seen that FX carry baskets, the returns, a lot of those have been recouped in the last few days. Actually, carry is still the best performing strategy year-to-date on certain metrics. The second theme we've been focused on is the funder rotation story. This idea that Euro should be used as a funder instead of some of these other currencies within the Euroblock, like the Swiss franc, for example, was the most glaring example or stocky, where the fiscal situation is better. The reason predominantly was that the OAT spread widening is still not reflected in the Euro, we think, fair value for Euro-dollar given a few accounts for the fact that actually OAT spreads have widened quite a bit, is much lower, closer to 106 than where we are currently. Obviously, we don't think it's going down all the way to 106, but it keeps us having a bit of a bearish bias. We think the most prudent thing to do here for clients, for investors is to actually be looking at a rotation of the funders more towards the euro. And then finally, we are retaining the long dollar bias. Obviously, this is no longer as high conviction as it was before the dollar had adjusted. Now we've just got a bit of a bias around it because I think that is a lot pricier than for the Fed already. And actually some of the data out of the US has been actually quite conflicting. So it's not quite clear if the Fed actually needs to go at breakneck pace here. So, you know, setting the stage with those three teams, I would say to me the highest conviction out of all of those is actually the first two, is the pro-cyclical carry team and the funder rotation team, which uses Euro as a funder. And the reason for that is that, you know, growth in the grand scheme of things is still holding up okay. We are getting into earning season and, you know, the Fed keeping rates high for longer is sort of a universally global team almost, where a lot of rates, interest rates are higher for longer. So carry still ends up being fairly attractive. So to me, the carry team actually means non-dollar funded carry, obviously not being, you know, it does not involve being the bearer of the dollar under any circumstances. But pro-cyclical carry and Euro as a funder is sort of the high convictions. The dollar bias, I'm not super convicted on right now, purely because, you know, we do have a lot of pricing for the Fed, as I said. And obviously some of the data today sort of keeps the October hikes in play, but equally the payrolls report was soft. So let's see how that turns out.

So with that, let me actually start with you, Patrick. Maybe we can talk about the US developments first. We had a decent amount of data come through and there's some policy issues that are also going to be in focus in the next two or three weeks. So can you just break those down for us?

Patrick Locke (3:33)

Yeah, sure. Thanks, Meera. So I think, look, regular listeners will recall that we were pretty bullish on the dollar August, September, but have kind of consolidated in the last couple of weeks as we started to show that data, as you suggested, was not quite as hot on some of these key tier one prints, like the last payrolls, for instance. Fed terminal, as you say, was looking pretty saturated there for a minute. So some of the momentum behind some of the factors driving the dollar uptrend over the last couple of months looked to be kind of cooling. That plus Fed speakers over the last couple of weeks, really starting to talk more about less urgency, tempered our enthusiasm around the dollar there. But my personal bias coming into this week was that maybe that had gone a little bit too far. So basically very little premium was left coming into this week for a hike in October. Overnight balls for the US CPI seemed particularly low, especially in the context of consensus headline, 60 basis points for CPI this week. And lo and behold, core beat pretty considerably, right? I think it was like 33.5 basis points. There was a breath within that print as well, suggesting that unlike last month, it wasn't just obviously kind of like one sector driving a price spike. And so granted, just for a few hours, you had a very strong kind of rates reaction in the dollar, I think, correspondingly or commensurately rose with that. I thought that was generally all appropriate.