The months of July and August will go down as one of the more memorable macro & political volatility episodes in recent history, analysts at JPMorgan said, in a note, dated Aug. 14.
“Over the course of six weeks, investors witnessed the replacement of a U.S. presidential nominee, an assassination attempt, a +10% JPY TWI [trade-weighted index] rally, a pivot to jumbo Fed cuts in September, and the single-largest intraday spike in VIX since 1990, among others events,” the bank said.
The foreign exchange response has been pronounced though the dust has yet to fully settle, the bank added, but the broad contours point to low-yield short-covering, high-yielding / pro-cyclical underperformance, and a volatile but net-weaker U.S. dollar.
The main FX casualty in the volatility spike was FX carry, which will be hard-pressed to recover the dominant status it enjoyed throughout the last 12-18 months.
Year-to-date carry returns have since been erased, and the bank’s various proxies for the broader carry trade positioning point to 65%-75% of those positions having now been unwound.
The dollar’s response to all this falls somewhere between as-expected and slightly disappointing, the bank added, with the 100-basis-point rally in the U.S. short-end simply too large for the dollar to ignore.
JPMorgan has lowered its USD forecasts, particularly through the USD/JPY pair. It now sees its USD/JPY forecast across the horizon to 2024/4Q at 146 and 2025/2Q at 144, from 147.
“We still see reasons to be optimistic on USD’s overall prospects: 1) the U.S. labor market is weakening but other data since have been ok; 2) RoW cyclical data isn’t sufficiently strong to drive USD lower; 3) the USD historically tends to consolidate after such large rate swings; 4) USD-positive risks from the US election still linger; and 5) August seasonality tends to be supportive for USD,” JPMorgan added.
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