Investing.com – Currency markets have seen a lot of volatility in recent weeks, leading JPMorgan to adjust its dollar forecasts.
The months of July and August will go down as one of the most memorable episodes of macro and political volatility in recent history, JPMorgan analysts said in an August 14 note.
“Over the course of six weeks, investors witnessed the replacement of a US presidential candidate, an assassination attempt, a +10% JPY TWI [trade-weighted index] rally, a turn to major Fed cuts in September, and the biggest intraday spike since 1990, among other things,” the bank said.
The exchange rate reaction has been pronounced, although the dust has not yet fully settled, the bank added, but the broad contours point to low-yield short-covering, high-yield/procyclical underperformance and a volatile but net weaker US economy. dollars.
The main currency casualty in the volatility spike was the currency carry, which will struggle to regain the dominant status it enjoyed over the past 12 to 18 months.
Year-to-date carry returns have since cleared, and the bank’s various proxies for broader carry trade positioning indicate that 65%-75% of those positions have now been unwound.
The dollar’s response to all this is somewhere between as expected and somewhat disappointing, the bank added, with the 100 basis point rally in the US short end simply being too big for the dollar to ignore.
JPMorgan has lowered its USD forecasts, mainly through the pair. It now sees its USD/JPY forecast ahead to 2024/4Q at 146 and 2025/2Q at 144, from 147.
“We still see reasons to be optimistic about the overall USD outlook: 1) the US labor market is weakening, but other data has been okay since then; 2) RoW cyclical data is not strong enough to push USD down; 3) The USD has historically tended to consolidate after such large interest rate moves; 4) Positive USD risks from the US election still remain; and 5) August seasonality is generally supportive for the USD,” JPMorgan said.
