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J.P. Morgan Mid Year FX Update.

USD

The US bank expects the USD to stay elevated, amid yield differentials and lingering exceptionalism. See below for more details.


J.P. Morgan: "Dollar to stay elevated on USD’s improving yield advantage and lingering exceptionalism; US elections add upside risks. Yield compression remains a key theme; risk-reward in global carry is unattractive, but G10 carry is more resilient. Funders to underperform tactically, but tariff risk/ lower yields create uncertainty. Housing may provide relief for early-cutter FX. Recession risk is well-priced in lower-yielders but not in high-yielders.

Macro Trade Recommendations: Maintain USD length vs EUR, CNH, but tactically as US exceptionalism has moderated but not exhausted. Be surgical with policy r.v. – long NOK vs SEK, EUR and AUD vs NZD. Case against JPY reversion remains compelling; be tactical around intervention risks (take profit AUD/JPY).

Emerging Markets FX: Stay neutral ahead of the US elections amid unresolved macro uncertainties. Favour idiosyncratic carry and FX with attractive valuations. Bullish picks are TRY, INR, MXN, UYU, PHP; Bearish on CZK, CNH, CLP, COP.

FX Derivatives: FX vol unlikely to trend higher despite US elections as firm growth, policy easing and USD length stymies outsized vol pickups. H2 themes: (a) preference for gamma over vol surface; (b) cheap US election hedges; (c) fading European risk premium; (d) RV within the Yen vol complex; (e) defensive long-end vol spreads. Increase elections exposure via 9m USD/CNH digi RR.

FX Technicals: EUR/USD to break below 1.04 in 2H24. USD/JPY looks like a mature bull cycle, but remains intact; watch for a trend reversal in the second half. AUD/USD to pressure broader range support in the months ahead."

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