JPMorgan Econ FI-Macro Trade Recommendations-107422751

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Kunj J Padh

(1-212) 834-5108

kunj.padh@jpmchase.com

J.P. Morgan Securities LLC

Patrick R Locke (1-212) 834-4254

patrick.r.locke@jpmchase.com

J.P. Morgan Securities LLC

James Nelligan (44-20) 3493-6829

james.nelligan@jpmorgan.com

J.P. Morgan Securities plc

Octavia Popescu (44-20) 3493-5654

octavia.popescu@jpmorgan.com

J.P. Morgan Securities plc

Global FX Strategy

05 April 2024

JPMORGAN

ity data continues to point to a strong US economy (including

this week’s NFP release), even if there has been some choppi-

ness in the FX price action (e.g. USD rallied on solid ISM

mfg, but fell on soft ISM services the next day). Nevertheless,

the US yield curve has bear steepened over the past two

weeks and supported the USD commensurately. This has

coincided with post-FOMC Fedspeak turning incrementally

more cautious around the timing of rate cuts, and the Fed OIS

strip now prices fewer ‘24 cuts than the SEP median dot — an

atypical development for this cycle (Figure 1The Fed OIS strip is now pricing fewer cuts than the SEP median dot, an atypical development for this cycle ). While this

might suggest risks to the USD from potential dovish Fed

repricing, we think the move higher in the long-end of the

yield curve is indicative of a more durable dollar support. All

in all, we’ve seen neither sufficient weakness in US activity

data nor a sustained rates rally such as to warrant a rethink on

our broader USD-bullish bias. We are tactically mindful of

USD-negative seasonality during April, but note that the USD

has historically rebounded to even higher levels during May

(Figure 2The USD shows negative seasonality in April, but stronger positive seasonality in May).

Figure 1: The Fed OIS strip is now pricing fewer cuts than the SEP

median dot, an atypical development for this cycle

End’24 Fed OIS pricing vs median ‘24 SEP dot, %

Source: J.P. Morgan

We expect elevated US yields to continue supporting the

USD even despite a broadening in global growth momen-

tum and the recent commodities rally; we’ve thus elected

to add (rather than trim) long-USD exposure. This week’s

global manufacturing output PMI showed a third consecutive

increase to 51.9, with the underlying details suggesting scope

for a further move higher (the new orders-to-inventory ratio is

now at its highest level since May’22). This multi-month

uptrend has been broad-based geographically (Figure 3The recent upturn in global PMIs has been broad-based).

While stronger RoW growth could admittedly pose a chal-

lenge to our USD longs (high-beta FX has indeed outper-

formed this week), we are cautious on over-interpreting the

pro-cyclical lift just yet, given that (1) markets are increasing-

ly pricing in high-for-long scenarios for DM central banks,

•We increase our long-USD exposure amid continued

US strength and rising prospects for high-for-long

rates, though US CPI presents a key tactical risk.

•Broadening global growth momentum should not

derail the USD bull case given ongoing US exceptional-

ism, elevated US yields, and lingering tariff risks.

•Scale up CHF shorts via long USD/CHF following

broadening global manufacturing improvement and

the surprise SNB cut; also short vs JPY & SEK.

•Reinitiate short EUR/SEK given attractive entry levels

now that dividend outflows have peaked; also long

SEK vs CHF & CZK.

•Stay short CAD vs a basket of USD & AUD to isolate

CAD alpha around next week’s BoC decision, with

expectations of a dovish pivot in guidance.

•Remain short EUR ahead of the ECB via the new

EUR/SEK short & a longer-dated EUR/USD digi put.

•New trades: Long USD/CHF and short EUR/SEK in

options.

•Existing trades: Long SEK vs CZK & CHF in cash.

Short CAD vs cash basket of USD & AUD. Short

CHF/JPY and EUR/USD in options.

•Closed trades: None.

Our portfolio has delivered mixed performance since we

last published as FX markets grapple with overlapping

signals from yields, growth, and commodities. We retain a

constructive bias on the USD and have added a new USD/

CHF call spread between publications, though US CPI next

week presents a key tactical risk. Short-CHF is one of our

higher-conviction views following the surprise SNB rate cut,

and we are now short vs USD, JPY & SEK. We continue to

favor SEK within the G10 high-beta bloc and add a new

EUR/SEK short this week given attractive entry levels. When

coupled with our longer-dated EUR/USD digi put, this new

trade also increases our short-EUR exposure ahead of the

ECB next week. Our remaining positions are largely oriented

around relative-value opportunities stemming from a combi-

nation of policy divergences, valuation, and/or carry (long

SEK/CZK, short CHF/JPY). We are also short CAD (vs 50:50

basket of USD & AUD) heading into next week’s BoC deci-

sion with expectations of a dovish pivot ahead of a first cut in

June.

We’ve scaled up our long-USD exposure in recent weeks

and retain a bullish medium-term bias. Incoming US activ-

Macro Trade

Recommendations

Kunj J Padh

(1-212) 834-5108

kunj.padh@jpmchase.com

J.P. Morgan Securities LLC

Patrick R Locke (1-212) 834-4254

patrick.r.locke@jpmchase.com

J.P. Morgan Securities LLC

James Nelligan (44-20) 3493-6829

james.nelligan@jpmorgan.com

J.P. Morgan Securities plc

Octavia Popescu (44-20) 3493-5654

octavia.popescu@jpmorgan.com

J.P. Morgan Securities plc

Global FX Strategy

Macro Trade Recommendations

05 April 2024

JPMORGAN

(2) the USD has historically outperformed in environments

where US real yields are rising alongside global PMIs (Figure

4The USD has historically outperformed in environments where US real yields are rising alongside global PMIs), and (3) potential US tariffs continue to linger as a back-

ground risk to global growth. These factors lead us to place

more weight on yields than growth at this juncture. Consistent

with this, our systematic FX strategists have shown quantita-

tively that rates remain a stronger tactical driver for FX mar-

kets than commodities. As dicussed in the Outlook, we

believe that the supply-driven nature of the recent commodi-

ties rally is ultimately dollar-supportive via anti-cyclical

channels. This is corroborated by the fact that USD and WTI

correlations are now near historical highs (Figure 5The rolling six-month correlation between the USD and WTI is now near historical highs ). With our

commodities strategists calling for oil prices to reach $100

later this year on supply factors, this suggests another channel

of support for our USD longs.

Figure 2: The USD shows negative seasonality in April, but stronger

positive seasonality in May

Average USD TWI performance in April & May over the past 15yrs

Source: J.P. Morgan, Bloomberg Finance L.P.

Figure 3: The recent upturn in global PMIs has been broad-based

Percentage of countries showing a 3m increase in the manufacturing output PMI

Source: J.P. Morgan

Figure 4: The USD has historically outperformed in environments

where US real yields are rising alongside global PMIs

Cumulative USD TWI returns based on global manufacturing PMIs & US 10Y TIPS

Source: J.P. Morgan, Bloomberg Finance L.P.

Figure 5: The rolling six-month correlation between the USD and WTI

is now near historical highs

Rolling 6m correlation between USD TWI and WTI

Source: J.P. Morgan

Our overall trades portfolio is somewhat hedged to a more

meaningful upturn in global growth via CHF shorts and

SEK longs on crosses. Among the G10 currencies, CHF

shows the second-most negative beta to the global PMIs

(behind USD) in the post-COVID era, while SEK shows the

most positive beta (Figure 6Our broader trades portfolio is somewhat hedged to a more meaningful upturn in global growth via CHF shorts and SEK longs on crosses). We added to our CHF shorts

intraweek amid extended franc weakness following the sur-

prise SNB rate cut, and this week’s miss in Swiss inflation

served as another catalyst for further downside. Our sense is

that investors are increasingly using CHF as a funding curren-

cy given idiosyncatic risks facing other potential candidates

like JPY (MoF intervention) and EUR (tariffs); we see scope

for this dynamic to continue posing headwinds for CHF. We

also add to our SEK longs this week via short EUR/SEK in

options. While SEK has underperformed in recent weeks on

local dividend flows and policy divergence, the dividend

pressure has now peaked and so we are inclined to enter new

Kunj J Padh

(1-212) 834-5108

kunj.padh@jpmchase.com

J.P. Morgan Securities LLC

Patrick R Locke (1-212) 834-4254

patrick.r.locke@jpmchase.com

J.P. Morgan Securities LLC

James Nelligan (44-20) 3493-6829

james.nelligan@jpmorgan.com

J.P. Morgan Securities plc

Octavia Popescu (44-20) 3493-5654

octavia.popescu@jpmorgan.com

J.P. Morgan Securities plc

Global FX Strategy

05 April 2024

JPMORGAN

longs at better entry levels. Additionally, this week’s Swedish

PMIs were strong across the board with the composite mea-

sure now at its highest level since Oct’22, further encouraging

our bullish SEK view.

Figure 6: Our broader trades portfolio is somewhat hedged to a more

meaningful upturn in global growth via CHF shorts and SEK longs on

crosses

Betas of TWIs to global manufacturing output PMI (12m chgs since 2021)

Source: J.P. Morgan

Next week includes significant event risks for our portfo-

lio via US CPI and multiple DM central bank decisions;

we stay short CAD in anticipation of a dovish BoC pivot

and add to EUR shorts ahead of the ECB. US CPI is of

course the main event risk next week, particularly given the

firmness in the Jan & Feb releases which Fed Chair Powell

has subsequently downplayed. USD reactions tend to be

mixed in the wake of the results (rather than consistently

weaker), which keeps us comfortable running long-USD into

the release (Figure 7The USD has displayed mixed reactions to recent CPI prints ). Another upside surprise could see a

large FX/rates response if it means questioning the Fed’s

ongoing guidance for easing this year. Turning finally to cen-

tral bank meetings next week, we hold onto our short-CAD

basket ahead of the upcoming BoC decision as we expect a

dovish pivot ahead of a first cut in June; as we’ve previously

discussed, the beta-neutral structure of this trade places the

onus on CAD weakness to drive performance (as seen after

this week’s soft CA labor data). Our economists highlight that

the ECB’s March minutes also point to a first cut in June,

with next week’s meeting an important barometer on whether

recent data has changed those odds; we stay tactically & stra-

tegically short EUR. And while we are tactically neutral on

NZD ahead of the RBNZ next week, we keep a bearish medi-

um-term bias given our long-held view that the NZ economy

faces idiosyncratic pressure from elevated rates due to the

unique structure of its housing market. Our economists expect

the RBNZ to eventually pivot abruptly rather than offer a

gradual transition to cuts.

Figure 7: The USD has displayed mixed reactions to recent CPI prints

USD TWI performance around CPI releases

Source: J.P. Morgan

Trades

•Hold CHF shorts vs SEK and JPY; added USD/CHF

call spread intra-week

We added to our existing CHF shorts vs SEK (in cash)

and JPY (in options) with a USD/CHF 0.91/0.93 call

spread this week. CHF has been relatively range-bound the

past two weeks, with key data prints this weeks including

Swiss CPI and SNB FX reserves.

There is scope for the large valuation gap between USD/

CHF and 5y rate spreads (Figure 8SNB intervention created a valuation gap between USD/CHF and rate spreads) to narrow somewhat

given SNB intervention is no longer a support, in our view.

The directionality of CHF rate spreads to the outright level of

global yields is also tilted in favour of USD/CHF if global

growth is being partly driven by a strong US, and the global

downward inflation trajectory is at risk from higher commod-

ity prices. In this regard, our commodity strategists are flag-

ging risks of Brent hitting $100bp. With limited scope to

price many for SNB cuts (with perhaps room for one more if

inflation keeps undershooting), this would have to be US/

global yield-driven. Swiss inflation undershot expectations,

with headline printing at 1.0%oya vs an expected 1.3%. The

inflation report took EUR/CHF to its highest since last May,

although it more-than-reversed by the evening alongside the

US equity sell-off. With limited scope to price many more

cuts and an SNB wary of running up its balance sheet,

emphasis for the next leg lower is on global growth, in our

view.

Preliminary SNB FX reserves this morning suggested,

upon valuation-adjusting, that the SNB sold CHF 15bn in

March, and ~13bn altogether in 1Q after near-flat numbers in

the first two months. This is about half of the 27bn stated by a

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1KunjJPadhAC(1-212)834-5108kunj.padh@jpmchase.comJ.P.MorganSecuritiesLLCPatrickRLocke(1-212)834-4254patrick.r.locke@jpmchase.comJ.P.MorganSecuritiesLLCJamesNelligan(44-20)3493-6829james.nelligan@jpmorgan.comJ.P.MorganSecuritiesplcOctaviaPopescu(44-20)3493-5654octavia.popescu@jpmorgan.comJ.P.MorganSe...

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