📝Dollar Is Already Trading Mid-Smile: J.P. Morgan FX Strategy

Moreover, we observe some evidence of the dollar already trading mid-smile, supported by positive RoW dynamics. A two-factor model of the dollar, which looks at relative equity performance + outright global equity performance, has performed well across cycles and has not dislocated the same way rates models have recently. Indeed, it did a good job explaining USD weakness to begin the year on the US’ relative underperformance. But on the US equity rebound, questions have arisen as to how punitive this might be for the short-dollar view. This model goes some ways to demonstrate that the global backdrop remains consistent with dollar weakness; RoW equities (to which the USD has a negative beta) have made record highs, and that inverse impulse has continued to put meaningful downward pressure on the dollar. So long as US-RoW equity performance remains reasonably balanced but global risk performs, that is a mid-smile environment in which the dollar can and should trade net lower (albeit, as stated above, with less intensity than if the US were to obviously revert to relative under-performance again like April). The model suggests that the dollar is 1% weaker for every 4.4% upside in global equities. - J.P. Morgan FX Strategy