USD ranking falls back, FX carry factors regain dominance

Overview

This report is an FX Macro Quant update from J.P. Morgan's Global FX Strategy team. Its core conclusion is that the USD's ranking within growth and multi-factor frameworks has declined significantly, while the FX carry factor has once again become a more attractive strategic direction. The report covers global, G10, and emerging market currencies, using growth revisions, inflation revisions, real and nominal carry, REER valuation, commodity terms-of-trade momentum, equity beta, and the T.E.A.M. multi-factor portfolio to assess relative value.

Core views

Global growth momentum remains tilted to the downside, with 32% of currencies showing significantly negative growth momentum and only 7% showing significantly positive growth momentum; however, the recent ceasefire and decline in energy prices have weakened the USD's safe-haven and countercyclical support. The USD's weight in the growth strategy has fallen from +100% to +60%, and in the T.E.A.M. portfolio it has also dropped from the top ranking with a +20% weight to 9th place with about a +6% residual weight. At the same time, broad upward revisions to inflation forecasts make real carry more meaningful, with the EM real carry basket up about +6% year-to-date and G10 carry also delivering about 2% over the past 2-3 weeks. The report believes that in the current environment, both real carry and nominal carry can play a role in G10, EM, and global portfolios.

Analysis framework

The report uses a top-down approach combining macro signals with cross-sectional relative value: it first uses J.P. Morgan FRI and EASI to measure growth and inflation momentum, then evaluates long-term valuation using REER CPI/PPI relative to their 15-year averages, constructs nominal, real, and risk-adjusted carry signals using 1M forward implied returns, core CPI, and implied volatility, and finally combines carry, growth, equity momentum, defensive implied volatility, commodity ToT, and valuation signals into portfolio weights through the T.E.A.M. model.

Methodology notes

• Macro MomentumGrowth momentum framework

  Growth momentum and the USD's countercyclical weight

  When global growth momentum is more negative, the framework assigns a positive weight to the USD; when growth momentum is more positive, the USD weight declines or turns negative. The report notes that within +/-50% can be viewed as a neutral range, and the current USD weight is +60%.

• Forecast RevisionsJ.P. Morgan FRI

  Forecast Revision Indices

  Uses standardized changes in growth or inflation forecast revisions to measure macro momentum. The report uses the 3-month change in 1-year Z-score to assess relative growth and inflation signals across currencies.

• Economic SurpriseEASI

  Economic Activity Surprise Index

  EASI is used to supplement relative growth value signals; for some countries with limited data, a combination of local and regional indices is used, with the final signal based on a 6-week moving average normalized by rolling extremes.

• Multi-factor AllocationFast T.E.A.M.

  FX multi-factor optimized portfolio

  The T.E.A.M. portfolio combines real carry, risk-adjusted carry, equity momentum, FRI, EASI, defensive implied volatility, commodity ToT, and REER valuation, and optimizes portfolio scores under minimum-variance constraints, with a single-currency weight cap of +/-20%.

• Valuation methodsREER CPI/PPI 15-year deviation

  Long-term real effective exchange rate valuation

  Measures whether a currency is cheap or expensive using the deviation of REER CPI and REER PPI from their 15-year moving averages; positive values indicate expensive and negative values indicate cheap.

• Carry ScreeningCarry screener

  High-carry currency cross screening

  First calculates nominal 1M forward return differentials across 27 currencies and screens for carry opportunities above 4%-5%, then excludes combinations with significantly negative real returns, and evaluates them further using equity beta, volatility, dispersion, entry points, and seasonal performance.

Asset mapping & comparison

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

• USD

  The USD's relative advantage is declining in the growth and T.E.A.M. frameworks

  Strengths

  Global growth momentum remains tilted downward, which in theory still supports the USD's countercyclical characteristics; the growth strategy weight is still +60%.

  Weaknesses

  The T.E.A.M. weight has fallen from +20% to +6%, with the ranking down to 9th; lower commodity ToT weight, weaker relative equity momentum versus EM, and lower implied volatility weaken the defensive signal.

  Comparison

  Compared with two weeks ago and late March, the USD ranking has fallen significantly, moving from a leading currency to the middle of the pack.

  Risks

  If global growth deteriorates markedly again or geopolitical risks escalate, the USD's safe-haven characteristics could strengthen again.

• FX carry strategies

  The report's most favored strategic direction

  Strengths

  Both real carry and nominal carry have room to perform, with EM real carry up about +6% year-to-date and G10 carry also rebounding over the past 2-3 weeks.

  Weaknesses

  Low-yield currencies have repriced after the decline in energy prices, which may temporarily suppress the performance of some carry baskets.

  Comparison

  Compared with commodity ToT and some value factors, carry currently has stronger explanatory power and allocation appeal.

  Risks

  A reversal in equity market risk appetite, rising volatility, or deterioration in high-yield currency fundamentals could hurt carry returns.

• EM real carry basket

  A carry basket that has performed strongly in the inflation environment

  Strengths

  Up about +6% year-to-date, outperforming nominal or risk-adjusted carry formats.

  Weaknesses

  Sensitive to inflation, real yields, and EM risk appetite.

  Comparison

  Among EM single-signal strategies, real carry has outperformed other traditional carry baskets.

  Risks

  If inflation expectations decline, EM risk premia rise, or policy paths shift, performance could retrace.

• BRL、NOK、CAD

  Energy-related trades on the long side of T.E.A.M.

  Strengths

  BRL and NOK remain core energy trades, and CAD also retains some long exposure.

  Weaknesses

  The portfolio has already reduced energy exposure, and further cooling in energy would weaken related signals.

  Comparison

  Compared with pure energy exposure, the portfolio also adds HUF, TWD, and INR to diversify risk.

  Risks

  A continued decline in oil prices or further compression in commodity ToT signal dispersion.

• HUF、TWD、INR

  Diversified allocations on the long side of T.E.A.M.

  Strengths

  As European and Asian importer currencies, they help diversify the risks of energy trades such as BRL and NOK.

  Weaknesses

  Some currencies may still be affected by low yields, external demand, or local macro data.

  Comparison

  Compared with a single long position in energy currencies, these currencies enhance the portfolio's factor diversity.

  Risks

  Changes in growth momentum, inflation revisions, or regional risk appetite could reduce allocation attractiveness.

• EUR、SEK

  Core short-side currencies in T.E.A.M.

  Strengths

  As low-yield currencies with weak growth and unfavorable commodity momentum, they fit the short-side screening logic.

  Weaknesses

  Recently, energy importer currencies such as EUR and SEK have outperformed their historical oil-price beta following the decline in oil prices and ceasefire negotiations.

  Comparison

  The report still places them on the short side, but acknowledges that the explanatory power of commodity factors has weakened recently.

  Risks

  If energy prices continue to fall and improve Europe's terms of trade, the short thesis could be challenged.

• JPY

  Cheap on long-term valuation but clearly low-yielding

  Strengths

  REER valuation is about -27% cheap, close to historical lows.

  Weaknesses

  Low-yield Asian currencies remain persistently weak, which is unfavorable from a carry perspective.

  Comparison

  Valuation attractiveness coexists with carry disadvantages.

  Risks

  If interest rate differential pressures persist, valuation normalization may be delayed further.

Key data

• USD growth strategy weight+60%Below +100% two weeks ago; the report says the USD's growth signal ranking has dropped to the middle of the pack.
• Share of currencies with significantly positive growth momentum7%Corresponding to THB and RUB.
• Share of currencies with significantly negative growth momentum32%Up from 18% two weeks ago, including IDR, EUR, GBP, INR, AUD, SEK, CNY, PHP, and ZAR.
• EM real carry basket year-to-date performance+6%The report says real carry has outperformed nominal or risk-adjusted carry amid inflation developments.
• Global risk-adjusted carry basket year-to-date performance+3%Performance remains positive, but it has been affected by the repricing of low-yield currencies after the drop in energy prices.
• G10 carry performance over the past 2-3 weeks+2%The report notes that G10 carry has also started rebounding recently.
• Brent change over the past two weeksabout -15%Despite the decline in oil prices, all nine G10 currencies appreciated against the USD, making the USD the main laggard.
• Commodity ToT weight in T.E.A.M.20%Down from 30%, indicating gradually lower energy exposure.
• USD T.E.A.M. weight+6%Down to 9th place from the top ranking and +20% weight at the end of March.
• USD long-term REER valuation+10% expensiveMeasured by deviation from the 15-year REER CPI/PPI average, the USD is the eighth most expensive globally.
• JPY long-term valuation-27% cheapClose to levels seen around September 2024.
• MXN long-term valuation+20% expensiveThe report says MXN is one of the most expensive currencies globally.

Impact & implications

The implication for asset allocation is that the simple logic of betting on the USD to benefit from slowing growth or energy shocks is weakening, and portfolios should focus more on carry income, real yields, and multi-factor diversification. The USD still has some countercyclical support, but its marginal advantage is declining; high-yield currencies in EM and G10 are becoming more attractive against the backdrop of upward inflation forecast revisions and yield differentials. The traditional relationship between commodity currencies and oil prices has recently broken down, suggesting that the commodity ToT factor is not suitable as the main trading basis in the short term.

Risks

• Geopolitics and the path of energy prices could still quickly alter growth, inflation, and commodity ToT signals.
• If safe-haven demand for the USD rises again, it could overturn the current trade direction implied by the USD's declining ranking.
• Carry strategies are sensitive to risk appetite, equity market beta, implied volatility, and funding costs.
• The explanatory power of the commodity ToT factor has recently declined; if the energy market becomes highly volatile again, model weights and portfolio performance may need to be adjusted quickly.
• Some EASI and regional economic surprise data face sparse samples or regional substitution treatment, which may affect the stability of signals for certain currencies.
• The report includes model and screening frameworks; actual trading still needs to incorporate analyst views, liquidity, execution costs, and risk limits.

What to watch

• Whether the USD's weight in the growth strategy continues to fall and drops back into the +/-50% neutral range.
• Whether the share of negatively trending currencies in global growth FRI continues to exceed the share of positively trending currencies.
• Whether inflation FRI continues to be revised upward, and whether real carry continues to outperform nominal carry.
• Whether the explanatory power of G10 currencies relative to S&P 500 beta persists.
• Whether commodity ToT momentum dispersion continues to decline, or widens again due to renewed energy volatility.
• Changes in the weights of the USD, energy currencies, and low-yield Asian currencies in the Fast T.E.A.M. portfolio.
• Brent prices, performance of energy importers, and deviations of EUR and SEK relative to their oil-price beta.
• High-carry cross opportunities screened jointly by 1M forward carry, real yield differentials, implied volatility, and equity beta.