Bullish USD stance turns neutral, but yen intervention has yet to disrupt the global carry-trade theme

Overview

This weekly report focuses on the USD outlook following weaker US data, the similarities and differences between the 2026 yen intervention and that of 2024, and whether global carry trades can remain resilient. The report believes near-term USD upside has narrowed and therefore ends its bullish USD recommendation; however, intervention has not fundamentally changed yen supply and demand or triggered broad deleveraging, leaving carry as the higher-conviction strategic theme.

Core views

The report first shifts its bullish USD recommendation, in place since May, to neutral. Improving US data and repricing of Fed expectations had previously pushed real yields up by approximately 100bp, supporting long-USD positions, but the USD consistently failed to break out of its range over the past month. The institution lists five reasons for declining conviction: two consecutive soft nonfarm payroll and inflation releases, a temporary easing of the US-Iran conflict, improving signs of global growth, renewed negative USD sensitivity to the long end of the US Treasury market, and coordinated US-Japan FX intervention. The report retains a modest bullish USD bias but judges that the range may narrow, so it closes the long-USD basket against low-yielding G10 currencies at a small loss and reallocates risk budget to carry trades. The USD outlook remains highly dependent on data and near-term Fed pricing. The report notes that, amid limited forward guidance and still-concerning inflation, rate pricing in the second half of 2026 may remain volatile. DXY remains closely linked to September FOMC pricing, while the USD is inversely related to the steepness of the 2s30s curve and has also regained sensitivity to the shape of the 5s30s curve. Thus, even though the institution has removed its directional bullish USD position, the impact of US CPI and other data on Fed expectations may continue to drive short-term USD moves. Regarding the yen, this coordinated intervention marks the first US participation in yen purchases since 1998, indicating that Washington is more willing than expected to support efforts to limit excessive yen depreciation. The report believes the intervention appears to have been implemented through EUR/JPY rather than USD/JPY, which is more consistent with helping Japan stabilize the yen than with broadly weakening the USD. The event also indicates that Japanese authorities regard USD/JPY above 160 as excessive depreciation. Although joint intervention reduces upside risks to the USD/JPY forecast, the institution believes it has not fundamentally altered the weak-yen thesis and therefore maintains its year-end target of 164. The report also assesses other tools available to Japan. The Fed's FIMA repo facility can provide temporary USD funding, but it was not designed for FX intervention and cannot replace the Japanese Ministry of Finance's traditional permanent funding sources. Japan's cumulative intervention in 2026 has already far exceeded that of 2024, increasing constraints on traditional tools, but the Ministry of Finance can still generate cash from maturing FX reserve assets. It may therefore be further than the market assumes from directly selling US Treasuries on a large scale or relying significantly on FIMA. Market attention to coordinated intervention, FIMA, and GPIF allocation adjustments reflects the authorities' search for alternatives to accelerating BoJ rate hikes. The report believes none of these tools is likely to materially change yen supply and demand in the near term and notes that its BoJ forecast now includes one rate hike in 2027. The actual impact of intervention on carry trades has been considerably smaller than the market might have feared. Even amid a sharp decline in oil prices, a technology-stock pullback, equity volatility, and the first coordinated yen purchases since 1998, the carry drawdown remained modest and largely confined to yen crosses. High-yielding currencies were broadly resilient, and the increase in broad FX volatility was also weaker than in 2024. The rise in the yen's trade-weighted index was relatively limited. Cross-asset comparisons show that its appreciation path has so far resembled that of 2024, but with fewer negative spillovers into other markets. This leads the report to continue treating the global carry basket as a core, high-conviction theme. Compared with 2024, this episode still contains several similar vulnerabilities. Both interventions occurred after marked USD declines. The 2026 action took place one day after the FOMC caused a -1.3-standard-deviation decline in DXY, followed by another USD fall after the nonfarm payroll release. In 2024, the yen did not reach an interim peak until about one month after the first intervention, and USD/JPY ultimately fell to 140. The report therefore warns against assuming that the current yen appreciation has ended. Before both interventions, the US 2-year yield had risen approximately 80bp from its low, pressuring the yen while supporting carry. If yields decline sharply—which is not the base case—yen-funded trades may deleverage further. Positioning is another shared risk. Tokyo Financial Exchange data indicate that yen shorts are cleaner in 2026 than in 2024, but CFTC indicators show a similar amount of yen shorts. Other futures indicators also show concentrated carry positioning before the intervention and FOMC, while the USD was positioned long ahead of both episodes. The report therefore believes that new shocks could still force further unwinding of carry positions and that current limited spillovers should not lead investors to overlook crowding. However, 2026 has three key differences that could limit 2024-style systemic deleveraging. First, in 2024 the BoJ unexpectedly raised rates after intervention, amplifying tighter financial conditions and cross-asset volatility; this time, the BoJ did not raise rates within 24 hours of the first intervention. Second, the global growth foundation is firmer: global manufacturing PMI has remained above 52 since April, whereas in 2024 it was mostly above 50 but never exceeded 51 and fell quickly when the US labor market weakened in July. Third, political shocks are weaker. In 2024, Mexico's policy rate was approximately 11%, and the Mexican peso was also hit by positioning shocks related to domestic elections and potential constitutional amendments. The current policy rate is 6.5%. Although political factors periodically disrupt exchange rates ahead of Brazil's October election, the report judges their impact on the overall FX market to be more manageable. Commodity terms of trade are broadly supportive of carry but also create tactical risks. Brent crude's realized volatility has risen from 26% in 2024 to 66% in 2026. Because commodity exporters are often relatively high-yielding currencies on average, while low-yielding Asian and European currencies tend to be on the other side, commodity shocks support carry returns to some extent. However, sharp commodity volatility such as that seen in early March has still triggered deleveraging, so geopolitical conflict and sudden surges in commodity volatility may continue to cause temporary drawdowns. In specific strategies, the report closes its long-USD basket against low-yielding developed-market currencies including NZD, CAD, SEK, CHF, and EUR; the table shows a return of -0.69% for this trade. It continues to hold a basket short CHF and long AUD, USD, and HUF, currently returning 0.27%. It remains short CAD/MXN, a trade returning 3.60%, and raises the trailing take-profit to +2%. EUR/SEK and AUD/SEK shorts hit their trailing take-profits, returning 1.00% and 0.75%, respectively. The NOK/SEK call spread is held to maturity. Emerging-market FX remains overweight overall, but exposure has been reduced since July 24 to balance risks from global funding conditions, the US-Iran conflict, and weak August seasonality. Regional allocations are overweight Latin America, market weight emerging EMEA, and underweight Asia. The report believes carry returns remain central to Latin American FX resilience, while EMEA retains a preference for high carry. The derivatives section believes that, as uncertainty over US rates rises, implied FX volatility has begun to edge higher, but macro tail risks remain modestly priced and the overall backdrop is still supportive of carry. Yen intervention has made skew and barrier-option premiums expensive. The report favors harvesting skew premium through a 3-month, delta-hedged USD/JPY ATM/25D, 1×1.5 ratio put spread. It also uses 3-month, delta-hedged USD/MXN and EUR/PLN ATM/25D, 1×2 vega-notional ratio call spreads to capture returns from previously underperforming emerging-market skew. Quantitative models also support a more defensive but still net-long carry allocation. Within the global portfolio, the real carry strategy has still generated double-digit year-to-date returns. The USD weight in the economic-momentum framework has fallen to -20%, its lowest since March. Of 28 tradable currencies, 21% show significantly positive growth momentum and 14% show significantly negative momentum. JPY and SEK rank first and second in growth momentum, while EUR's ranking has improved markedly and is now above USD. Long-term REER indicators show 17 currencies as expensive and 13 as cheap. Although emerging-market valuation dispersion has declined slightly, it remains near a five-year high, while the G10 valuation gap also remains elevated. Within G10, the TEAM multifactor portfolio favors AUD, NOK, JPY, and newly added SEK. In emerging markets, it remains long BRL but reduces COP, while EUR ranks poorly due to multiple weak signals. Technical signals are mixed. After sharp two-way moves, DXY has returned to its 2025–2026 range, leaving the technical structure ambiguous. EUR/USD has rebounded from 1.134, the 38.2% retracement corresponding to the February 2025 low, potentially disrupting the developing downside momentum. The EUR/GBP rebound lost momentum below resistance at a key pattern breakdown. USD/JPY rapidly fell to the 154.78–155.04 support zone, and the report suggests that the exchange rate may establish a new 155–160 trading range.

Analysis framework

The report first adjusts its USD view based on US data, Fed pricing, and sensitivity to the yield curve, and then analyzes how coordinated US-Japan intervention, FIMA, and Japanese policy tools affect yen supply and demand. It subsequently compares exchange rates, yields, positioning, growth, politics, and cross-asset volatility around the 2024 and 2026 interventions to determine whether carry-trade deleveraging will become systemic. Finally, it combines regional allocation, trade portfolios, derivatives relative value, the TEAM multifactor model, and technical levels to formulate specific FX views.

Methodology notes

• Event Games and Behavioral FinanceEvent-driven analysis

  Comparison around yen intervention events and across years

  The report compares exchange-rate, volatility, and cross-asset performance during the three months before and one week after the first interventions in 2024 and 2026, while using differences in policy tools to assess the persistence and spillover effects of the current intervention.

• Quantitative/Factor/Portfolio TheoryMulti-factor model

  T.E.A.M FX multifactor model

  The model combines signals including real carry, risk-adjusted carry, growth-forecast revisions, economic surprises, commodity terms of trade, REER valuation, and defensive volatility. It standardizes them across currencies to determine portfolio weights; signals are capped between -2 and +2, and the portfolio is rebalanced every Tuesday.

• Quantitative/Factor/Portfolio Theory

  Cross-sectional real carry strategy

  The report measures real carry as the currency's 1-month forward-implied yield minus core CPI and compares high and low rankings across the global currency cross-section to identify yield returns and inflation-adjusted holding appeal.

• Quantitative/Factor/Portfolio Theory

  Long-term REER valuation deviation

  The report uses deviations of CPI- and PPI-based real effective exchange rates from their 15-year moving averages to determine whether currencies are expensive or cheap and compares valuation gaps between G10 and emerging-market long-short portfolios.

• Quantitative/Factor/Portfolio Theory

  Standardization of growth momentum and economic surprises

  The report places signals such as the one-year Z-score of 3-month growth-forecast revisions and economic-activity surprise indices into a currency cross-section to identify relative improvements or deterioration in growth and adjust USD and other currency weights accordingly.

• Quantitative/Factor/Portfolio Theory

  Volatility-skew relative value

  The report compares the skew and barrier premiums of ATM and 25D options and uses delta-hedged ratio spreads to seek to harvest volatility risk premiums considered expensive or previously underperforming.

Asset mapping & comparison

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

• USD

  Following weaker US data, the report ends its recommendation to go long against low-yielding G10 currencies but retains a modest bullish bias.

  Strengths

  Still supported by near-term Fed pricing and relatively high interest rates.

  Weaknesses

  It has recently failed to break out of its range, its economic-momentum model weight has fallen to -20%, and it has regained negative sensitivity to the long end of the US Treasury market.

  Comparison

  EUR's growth-momentum ranking has improved to above USD.

  Risks

  Significant changes in US CPI or September FOMC pricing could amplify USD volatility again.

• JPY and USD/JPY

  Coordinated intervention supports the yen and restrains USD/JPY upside risk, but the report believes the weak-yen thesis has not fundamentally changed.

  Strengths

  JPY has a low valuation, strong growth signals, and support from coordinated US-Japan intervention.

  Weaknesses

  Alternative intervention tools are unlikely to materially change supply and demand in the near term, while Japanese authorities are also reluctant to rely primarily on faster rate hikes.

  Comparison

  The current yen appreciation has so far resembled the 2024 path, but spillovers into other FX and cross-asset volatility have been smaller.

  Risks

  Additional intervention, GPIF adjustments, or changes in policy tools could drive further yen appreciation; crowded shorts could also accelerate unwinding.

• Global carry trades

  After reducing directional USD risk, carry becomes a core component of the report's trading strategy.

  Strengths

  Growth is resilient, the risk-appetite environment remains relatively supportive, yield differentials remain high, and drawdowns have stayed limited despite multiple recent shocks.

  Weaknesses

  Positioning is concentrated in some markets, and volatility in the funding currency, the yen, could trigger deleveraging.

  Comparison

  Unlike the systemic unwinding in 2024, the current drawdown has been largely confined to yen crosses.

  Risks

  A sharp fall in US yields, continued yen appreciation, surging commodity volatility, or new policy shocks could force position unwinding.

• Emerging-market FX

  Remains overweight overall, but exposure has been reduced since July 24; regionally, Latin America is overweight, EMEA market weight, and Asia underweight.

  Strengths

  Latin American currencies remain supported by carry returns, while some commodity exporters also benefit from terms of trade.

  Weaknesses

  Weak August seasonality, global funding conditions, and geopolitical conflict increase near-term uncertainty.

  Comparison

  Latin America's allocation exceeds those of EMEA and Asia; EMEA retains a preference for high carry.

  Risks

  The US-Iran conflict, sharp commodity-price volatility, and tightening global funding conditions.

• CHF against AUD, USD, and HUF basket

  The report remains short CHF and long AUD, USD, and HUF.

  Strengths

  AUD is supported by carry and commodity terms-of-trade momentum.

  Weaknesses

  The portfolio's current return is only 0.27%, and changes in macro safe-haven demand could affect CHF performance.

  Comparison

  Compared with the closed low-yielding currency basket against USD, this trade is retained as an expression of carry.

  Risks

  A marked increase in risk aversion could support CHF.

• CAD/MXN

  The report remains short CAD/MXN, with a current return of 3.60%.

  Strengths

  Latin American carry is still viewed as the core source of MXN resilience.

  Weaknesses

  Mexico's policy rate has fallen from 11% in mid-2024 to 6.5%, reducing its carry advantage relative to that period.

  Comparison

  The current trade has outperformed the other existing cash positions listed in the report.

  Risks

  Global risk reduction, commodity volatility, or Latin American political risk could weaken MXN.

• NOK/SEK option

  The report holds a 3-month NOK/SEK call spread with strikes of 1.01/1.03 to maturity.

  Strengths

  NOK has favorable carry and commodity terms-of-trade momentum.

  Weaknesses

  SEK's growth signal has strengthened, and it recently recorded the largest increase in its TEAM score.

  Comparison

  Both NOK and SEK receive some model support, giving this relative trade more balanced fundamentals.

  Risks

  Relative changes in Swedish and Norwegian growth or central-bank expectations could affect the spread.

Key data

• Year-end USD/JPY target164Maintained after coordinated US-Japan intervention
• Change in real yields during the bullish USD periodApproximately 100bpIncrease during the repricing of Fed expectations
• One-day DXY shock after the 2026 FOMC-1.3 standard deviationsJapanese intervention occurred the day after this significant USD decline
• Increase in US 2-year yieldApproximately 80bpRise from the low in 2Q26, similar in magnitude to the same period in 2024
• Global manufacturing PMIAbove 52 since AprilMostly above 50 in 2024 but never exceeded 51
• Realized Brent crude volatility66%2026 level; 26% in 2024
• Mexico policy rate6.5%Approximately 11% in mid-2024
• USD weight in the economic-momentum framework-20%Lowest since March
• Share of currencies with significantly positive growth momentum21%Among 28 tradable currencies, 14% are significantly negative
• Long-term REER valuation distribution17 expensive, 13 cheapLong-term valuation indicator relative to the 15-year moving average
• Return on low-yielding currency basket against USD-0.69%The report decided to close the position and accept a small loss
• Return on short CAD/MXN3.60%Position retained, with trailing take-profit adjusted to +2%
• Return on short-CHF basket0.27%Counterpart currencies are AUD, USD, and HUF; position retained
• USD/JPY technical support zone154.78—155.04Support area reached after the sharp decline
• Potential USD/JPY trading range155—160Potential new range proposed by the technical strategy

Impact & implications

The report believes the USD is shifting from a one-way bullish trade toward more data-dependent range trading, but this does not amount to an outright bearish USD view. US-Japan intervention may restrain upside tail risk in USD/JPY and produce further yen appreciation, but it is not yet sufficient to change the yen's medium-term supply-demand dynamics or disrupt the global carry environment. Because 2026 has not seen a surprise BoJ rate hike, global growth is stronger, and political shocks are weaker, broad deleveraging is expected to be milder than in 2024. The strategic focus therefore shifts from USD directionality to carry, regional relative value, and option skew.

Risks

• US CPI or other data could significantly alter September FOMC pricing and renew broader USD volatility.
• Further yen appreciation, additional coordinated intervention, or other policy tools could force crowded yen shorts and carry positions to unwind.
• A sharp decline in US yields outside the base-case scenario could amplify deleveraging in yen-funded trades.
• Global carry positioning remains concentrated in some markets, and new shocks could cause broader liquidation.
• The US-Iran conflict, deteriorating global funding conditions, and weak August seasonality could weigh on emerging-market FX.
• Another sharp increase in commodity volatility could trigger a temporary carry drawdown.
• Political disruptions ahead of Brazil's October election could affect Latin American FX.

What to watch

• Watch US CPI and its impact on September FOMC pricing and the USD.
• Watch for additional intervention by Japan's Ministry of Finance, FIMA use, GPIF allocation adjustments, and changes in BoJ policy.
• Watch whether yen appreciation spreads from crosses into global carry and cross-asset volatility.
• The G10 central-bank meetings listed in the report include the RBA on August 11, Norges Bank on August 13, and the Riksbank on August 20; J.P. Morgan expects all three to remain on hold.
• The emerging-market central-bank meetings listed in the report include Romania on August 10, Peru on August 14, and Indonesia on August 19; J.P. Morgan expects all three to remain on hold.
• Watch inflation data from Norway, the US, Canada, the UK, and Japan, as well as labor-market data from Sweden, the UK, and Australia.
• Watch UK, euro-area, and Japanese GDP, along with Japanese, euro-area, and UK PMIs, for confirmation of local growth narratives.