Foreign exchange markets have experienced a great deal of volatility over the past few weeks, and this has led JPMorgan (NYSE:JPM) to adjust its forecast for the dollar.
Analysts at JPMorgan said in a note dated August 14 that July and August will be marked as one of the most volatile months at the macroeconomic and political level, and will not be forgotten in recent history.
“Over the course of six weeks, investors witnessed the replacement of a U.S. presidential candidate, an assassination attempt, a 10% rise in the Japanese yen index with threats of yen swap trade, a shift to the Fed’s massive cuts in September, as well as the single largest daily rise in the VIX Volatility Index since 1990, among other events,” the bank said.
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The bank added that the foreign exchange response was clear although the dust has not yet completely cleared, but the outlines point to short-term low-yield coverage, weak high/pro-cyclical performance, and the volatility of the US dollar but the net US dollar is weaker.
The main hit by the high volatility in the foreign exchange market has been movable foreign exchange, which will be difficult to regain the dominant position it has enjoyed over the past 12-18 months.
Since then, year-to-date transfer revenues have been erased, and the Bank’s various indicators of broader transfer transactions indicate that 65% to 75% of those transactions have now been discarded.
The dollar response to all this is somewhere between the expected and the slightly disappointing, with the dollar rising 100 basis points at the end of US short positions too large for the dollar to ignore.
JPMorgan lowered its forecast for the US dollar, particularly through the USD/JPY pair. It now sees its forecast for USD/JPY on the horizon 2024/4 quarter at 146 and 2025/2 quarter at 144 from 147.
“We continue to see reasons for optimism about the outlook for the US dollar in general: 1) the US labor market is weak but other data since then has been good; 2) cyclical data in the West is not strong enough to push the US dollar lower; 3) the US dollar has historically tended to consolidate after such large price fluctuations; 4) the positive risks for the US dollar from the US elections remain; and 5) the seasonality of August tends to be supportive to the US dollar’.
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