JPMorgan turns moderately constructive on USD, while global growth signals still favor EUR and GBP

Overview

This global FX quantitative strategy report explains why JPMorgan has become tactically more constructive on the US dollar even though its relative-growth framework continues to argue against US exceptionalism. It reviews growth, valuation, carry, commodity terms of trade and the resulting Fast T.E.A.M. currency allocation across G10 and emerging markets.

Core views

JPMorgan’s Fast T.E.A.M. systematic framework has shifted to a moderate long USD. The report attributes the change to two tactical forces: FX implied volatility has repriced higher from July lows, and persistently high energy prices favor less-cyclical exporters. These signals improve the dollar’s ranking despite weak growth inputs. The institution also reduced the portfolio’s pro-cyclical bias by trimming shorts in G10 mid- and low-beta currencies and replacing some exposure with emerging markets, reflecting its view that current energy levels can threaten broader risk assets. The growth case remains the principal counterweight to the USD long. The USD weight in JPMorgan’s economic-momentum framework is -40%, which the report views as a mid-USD-smile environment and within its +/-50% neutral threshold. The model assigns a positive USD weight when global growth breadth is more negative and a negative one when it is more positive, reflecting the dollar’s anti-cyclical characteristics. Currently, 18% of currencies show significant positive growth momentum, including EUR, GBP, BRL and JPY, versus 11% with significant negative momentum, including CLP and ZAR. EUR and GBP rank first and third, respectively, across roughly 30 currencies in the composite of Growth Forecast Revision Indices and Economic Surprise Indices, whereas the USD sits in the bottom five. IDR also screens strongly; ZAR, CZK and CLP have the weakest composite growth momentum. Valuation signals show a broad increase in currency richness. The USD is ranked sixth globally on long-term valuation measures at 11% rich relative to the 15-year average of its REER CPI and REER PPI measures, near cycle lows and around levels preceding the first Federal Reserve hike in March 2022. In G10, EUR is 9% rich, NOK 3% rich and SEK 3% cheap. AUD rose to 14% rich from 12% in August, its highest level since 2014, while JPY recovered to -22%. SGD is the richest currency at 22%, below its 25% year-to-date peak; COP is at 21%; HUF has declined to 10% rich from a 22% late-May peak. The report notes that 19 currencies screen rich against 11 cheap on long-term REER measures, with elevated EM valuation dispersion and slightly reduced G10 dispersion. Carry remains a major source of FX performance, but JPMorgan emphasizes the difference between real carry and traditional risk-adjusted carry in an inflationary, energy-sensitive environment. Global and EM real-carry baskets are up 13% and 16% year-to-date, compared with 7% and 7% for risk-adjusted carry. In the latest month, real carry returned 1.4% globally and 2.8% in EM, versus 0.4% and 0.8% for the risk-adjusted benchmark. With oil averaging above $90 over the prior six months, the report argues that real carry offers more insulation than traditional carry; in EM, it delivered more than twice the year-to-date return of risk-adjusted carry. It nevertheless cautions that a broad risk deleveraging could still harm carry. G10 carry has underperformed as the yen strengthened, with risk-adjusted carry down 1.5% since its September peak, and remains heavily dependent on AUD and NOK trajectories and therefore exposed to energy prices. Commodity terms of trade have again become important in FX cross-sectional performance. JPMorgan links the recent rebound in its G10 commodity-terms-of-trade momentum strategy to Brent’s 20% rise and the dollar’s recovery; the basket is up 6% year-to-date and is long USD and NOK against EUR and SEK. The report says currencies’ oil beta helps explain recent performance, creating concentration risk among carry-and-energy longs such as AUD, NOK, BRL and COP, and among opposite-side shorts including SEK, EUR, CHF, CLP, SGD and THB. Relative growth momentum also delivered strongly over the past month: the composite FRI/EASI basket returned 3.0% globally and 3.4% in EM, while the EASI-only global basket is up 8% year-to-date. The current Fast T.E.A.M. allocation reflects these competing signals. The portfolio retains LatAm carry as a core exposure, with 32% allocated across BRL, COP and MXN. IDR remains the highest-ranked currency across signals, while NOK and CAD are the preferred G10 high-beta longs because of commodity-terms-of-trade strength. USD has been added at a moderate weight; the table shows an 8% optimized weight. KRW longs were cut after weaker growth and equity momentum. On the short side, the portfolio remains bearish on ZAR, CZK and HUF, favors CNY and SGD as low-yield, low-volatility funding currencies, and remains short CLP and ILS to hedge directional risk. EUR and CHF shorts were removed because EUR has strong growth momentum and CHF benefits from higher implied volatility; GBP’s ranking has improved materially, supported especially by carry and growth momentum. The report describes T.E.A.M. as a multi-factor FX framework that was revised after its 2022 launch. It replaced the current-account metric with commodity terms of trade, added portfolio optimization, and reintroduced a long-term value measure. Inputs include real carry, risk-adjusted carry, local equity momentum, growth forecast revisions, economic surprises, defensive implied volatility, commodity terms of trade and REER value. Signals are cross-sectionally z-scored and capped at +/-2. The optimization maximizes the composite multi-signal score subject to a minimum-variance constraint, uses five-year currency trade-weighted-index correlations to capture stress-period relationships, caps individual currency weights at +/-20%, and applies regional exposure constraints. Its separate carry screener begins with 1-month-forward yield differentials across 27 currencies, filters for carry above 4-5%, removes significantly negative real-carry positions, then applies equity-beta and other discretionary filters.

Analysis framework

JPMorgan combines cross-sectional growth, valuation, carry, volatility, commodity-terms-of-trade and equity-momentum signals to rank currencies. It compares recent and year-to-date strategy returns, examines oil sensitivity and valuation dispersion, then converts the factor scores into a constrained minimum-variance portfolio with regional and position-size limits.

Methodology notes

• Quantitative, Factor, and Portfolio TheoryMulti-factor model

  Fast T.E.A.M. multi-factor FX allocation model

  The model combines carry, growth, volatility, commodity terms of trade, equity momentum and value measures to rank currencies and form an FX portfolio.

• Quantitative, Factor, and Portfolio TheoryMean-Variance Analysis (Markowitz)

  Score-and-variance portfolio optimization

  The portfolio maximizes its composite signal score while applying a minimum-variance constraint, using five-year currency correlations, regional limits and a +/-20% per-currency cap.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Commodity terms-of-trade and oil-price transmission to currencies

  The report assesses how higher energy prices and commodity terms of trade affect exporter currencies, carry performance and cross-sectional FX returns.

• Other

  REER CPI/PPI long-term valuation deviation

  Currencies are judged rich or cheap by their average REER CPI and REER PPI deviation from a 15-year moving average.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• USD

  Moderate long in the Fast T.E.A.M. portfolio as higher implied volatility and commodity momentum offset weak growth momentum.

  Strengths

  Improved volatility and commodity-terms-of-trade signals; 8% optimized portfolio weight.

  Weaknesses

  Bottom-five ranking in composite growth signals and a -40% growth-framework weight.

  Comparison

  EUR and GBP rank more strongly on relative growth momentum.

  Risks

  A broad risk deleveraging could weaken FX carry and broader risk-sensitive positioning.

• BRL, COP and MXN

  Core LatAm carry exposure.

  Strengths

  Collectively account for 32% of the portfolio’s LatAm carry allocation; BRL and COP also benefit from energy-linked dynamics.

  Comparison

  IDR is the top-ranked Asian currency across signals.

  Risks

  Exposure is concentrated in carry and energy-sensitive currencies.

• IDR

  Preferred long and top-ranked currency across signals.

  Strengths

  Strong across all signals and supported by carry, growth and value inputs.

  Comparison

  Ranks ahead of other Asian currencies in the T.E.A.M. assessment.

• NOK and CAD

  Preferred G10 high-beta longs.

  Strengths

  Supported by strong commodity terms-of-trade dynamics.

  Weaknesses

  G10 carry is dependent on AUD and NOK trajectories.

  Comparison

  Commodity ToT basket is long NOK and USD against EUR and SEK.

  Risks

  High exposure to energy-price moves.

• ZAR, CZK and HUF

  Bearish EMEA emerging-market positions.

  Weaknesses

  Weak growth or commodity-terms-of-trade signals.

  Comparison

  ZAR and CZK are among currencies with weak relative-growth momentum.

• CNY and SGD

  Preferred low-volatility Asian funding shorts.

  Strengths

  Low-yield and low-volatility funding characteristics.

  Comparison

  Used as funding currencies rather than directional longs.

Key data

• USD growth-framework weight-40%More currencies show positive than negative growth momentum; within JPMorgan’s +/-50% neutral threshold.
• Currencies with significant growth momentum18% positive; 11% negativePositive examples include EUR, GBP, BRL and JPY; negative examples include CLP and ZAR.
• USD long-term valuation+11% richRelative to the 15-year average of REER CPI and REER PPI; ranked sixth globally.
• Real carry year-to-date return13% Global; 16% EMVersus 7% and 7% for risk-adjusted carry.
• Latest-month real carry return+1.4% Global; +2.8% EMVersus +0.4% and +0.8% for risk-adjusted carry.
• Composite growth-momentum return+3.0% Global; +3.4% EMLatest-month return for the FRI/EASI composite basket.
• LatAm carry allocation32%Allocated across BRL, COP and MXN in the T.E.A.M. basket.
• Commodity terms-of-trade basket return+6% year-to-dateThe G10 basket is long USD and NOK versus EUR and SEK.

Impact & implications

The report’s allocation favors a tactical USD long because volatility and commodity signals have strengthened, but it does not interpret this as renewed US growth exceptionalism. It continues to favor real carry over risk-adjusted carry in the current oil-price backdrop, maintains meaningful LatAm carry exposure, and shifts away from some pro-cyclical FX risk while retaining commodity-linked long positions.

Risks

• A broad risk deleveraging could still hurt FX carry even if real carry is relatively insulated from energy-driven inflation shocks.
• G10 carry remains dependent on AUD and NOK and is therefore exposed to energy-price moves.
• Oil-beta overlap creates concentration risk among energy-and-carry long currencies and among opposite-side short currencies.
• Nordic growth signals can take extreme values because EASI data points are scarce.

What to watch

• FX implied volatility following its rebound from July lows.
• The breadth of positive versus negative global growth momentum and the USD weight in the growth framework.
• Oil prices and commodity terms-of-trade momentum, particularly for NOK, CAD, AUD, BRL and COP.
• Relative growth momentum in EUR, GBP, IDR, ZAR, CZK and CLP.
• Whether further broad risk deleveraging disrupts carry performance.
• Changes to the Fast T.E.A.M. allocation, including the USD position and the removal of EUR and CHF shorts.