J.P. Morgan: Maintain Bullish USD and Carry Trade Strategy, Overweight EM FX

Overview

J.P. Morgan releases its Global Macro Outlook and Strategy report, covering interest rates, commodities, currencies, and emerging markets. The core view is to maintain a bullish stance on the US dollar and carry trade strategies. It expects the Fed to pause rate hikes throughout 2026, but US Treasury yields will rise due to term premium normalization and valuation factors. The report recommends shorting 10-year US Treasuries relative to German Bunds, overweighting EM FX, and provides a detailed outlook on supply-demand dynamics for aluminum and oil in the commodities sector.

Core views

On interest rates, the report expects the Fed to keep the federal funds target range at 3.5-3.75% unchanged in 2026, with a possible rate hike in Q3 2027. The 2-year and 10-year US Treasury yields are expected to rise to 4.20% and 4.70%, respectively, by end-2026. It recommends shorting 10-year US Treasuries relative to German Bunds and entering into a 10s/30s US Treasury curve flattening trade. Developed market central banks are expected to gradually tighten policy slightly, with Euro and GBP rates likely to fluctuate within a range. On commodities, oil flow through the Strait of Hormuz in June is estimated at 5.1 million barrels/day, recovering but still only 25% of pre-war levels. The aluminum market faces a sharp deficit, with an average price of $3,750/ton expected in H2 2026, potentially pushing towards $4,000/ton. China and the US reached an agreement, with China committing to purchase at least $17 billion worth of US agricultural products annually. On currencies, maintain a bullish USD/bullish carry barbell strategy. The USD typically appreciates ~5% in the 6 months before the Fed's first rate hike. USD/JPY target for Q4 2026 is seen at 164. EUR/USD medium-term target lowered to 1.15 for Q3 2026. RMB is constructive in the short term, with USD/CNY seen at 6.70 in Q4 2026. On emerging markets, upgrade EM FX rating from Market Weight to Overweight (OW), primarily in high-yielders and currencies where central banks are preparing to hike rates. Maintain Market Weight (MW) for EM rates, sovereign, and corporate credit.

Analysis framework

The report employs a top-down macro analysis framework, combining economic growth, inflation, central bank policy paths, and geopolitical risks (such as Middle East conflicts and the situation in the Strait of Hormuz) for asset pricing. Trading strategies are derived by comparing valuations, spreads of different developed market government bonds, and historical USD performance during rate hike cycles. In commodity analysis, focus is placed on supply-demand balance sheets and inventory changes (e.g., depletion of hidden aluminum inventories). In FX analysis, judgments are made based on interest rate differentials, real yields, and historical cycle patterns (e.g., USD performance before the first rate hike).

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Supply-Demand Framework

  Predicts price trends by analyzing the balance between commodity supply (e.g., Middle East aluminum production, Strait of Hormuz flow) and demand (e.g., Chinese inventories, Asian cooling demand); used in this report to analyze aluminum and oil markets.

• Quantitative/Factor/Portfolio Theory

  FX Carry Trade

  Trading based on interest rate differentials between currencies; the report notes that carry trades have historically performed well in the early stages of the Fed's hiking cycle, recommending an overweight position in high-yielding currencies.

• Valuation Method

  Treasury Fair Value Model

  The report uses models to assess whether US Treasury yields deviate from fair value (e.g., pointing out that mid-curve US Treasury yields are 24bp below fair value), serving as the basis for shorting US Treasuries.

• Macroeconomic framework

  Central Bank Policy Path Analysis

  Predicts policy rate paths by tracking central bank meeting minutes, dot plots, and economic data (e.g., non-farm payrolls, inflation); used in this report to analyze the pace of rate hikes by the Fed and major developed market central banks.

Asset mapping & comparison

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

• 10-Year US Treasuries

  Negative Impact

  Weaknesses

  Valuation unattractive relative to other DM government bonds, yields expected to rise

  Comparison

  Underperform relative to German Bunds

  Risks

  Delayed Fed policy pivot

• US Dollar

  Positive Impact

  Strengths

  Yield advantage, signs of US exceptionalism intensifying

  Comparison

  Stronger performance relative to low-yielding currencies (EUR, CAD)

  Risks

  Iran deal could lead to short-term reversal

• EM FX

  Positive Impact

  Strengths

  High yield, central banks preparing to hike, low fundamental vulnerability

  Weaknesses

  Asian EMs under greater pressure from energy shocks

  Comparison

  LatAm and EMEA EMs outperform Asia

  Risks

  Global growth shock

• Aluminum

  Positive Impact

  Strengths

  Sharp supply-demand deficit, depletion of hidden inventories

  Risks

  Middle East smelters resume production faster than expected

Key data

• End-2026 2-Year US Treasury Yield4.20%Report forecast
• End-2026 10-Year US Treasury Yield4.70%Report forecast
• Fed Funds Target Range3.5-3.75%Unchanged throughout 2026
• June Oil Flow through Strait of Hormuz5.1 million barrels/dayRebound from May, but still 25% of pre-war level
• H2 2026 Average Aluminum Price$3,750/tonSharp deficit expected
• Q4 2026 USD/JPY164Report target price
• Q3 2026 EUR/USD1.15Medium-term target lowered
• Q4 2026 USD/CNY6.70Report forecast
• China's Commitment to Purchase US Agricultural ProductsAt least $17 billion/yearUS-China summit agreement

Impact & implications

A stronger USD may pose challenges for emerging markets, but the report believes high yields and proactive central bank stances support EM FX performance. Rising US Treasury yields will increase global financing costs, suggesting investors manage risk through curve trades (e.g., 10s/30s flattening). Tight commodity supply-demand conditions (especially aluminum) may raise costs along related industrial chains. Implementation of the US-China trade agreement helps support US agricultural exports.

Risks

• Escalation of Middle East conflict leading to further spike in energy prices
• Fed policy pivot faster than expected
• Large volatility in oil prices
• Growth shock in emerging markets
• Implementation of US-China trade agreement falls short of expectations

What to watch

• Fed meetings and 2027 dot plot
• Navigation status and oil flow through Strait of Hormuz
• Details of US-China trade agreement implementation
• Impact of El Niño on inflation and FX carry
• European natural gas inventories and winter prices