Despite a constructive view on commodity currencies like the Chilean peso and South African rand, their respective central banks have recently announced reserve accumulation programs. This intervention acts as a direct headwind, making the currencies "stickier" and muting the speed and magnitude of potential appreciation.
Japan's Takahichi administration has adopted a surprisingly expansionary fiscal stance. Instead of allowing the Bank of Japan to hike rates, the government is using fiscal spending to offset inflation's impact on purchasing power. This "high pressure" economic policy is a key driver of the yen's ongoing weakness.
North Asian economies, despite current account surpluses, exhibit balance-of-payments dynamics typical of deficit countries. This is caused by exporters holding dollars, domestic capital outflows, and foreigners hedging equity investments. This structural imbalance acts as a powerful headwind for regional currencies, overriding positive trade data.
Contrary to the common narrative, large equity inflows into the US from the AI theme are not reliably driving dollar strength. History shows Foreign Direct Investment (FDI) has a much stronger correlation with FX performance. Currently, timely FDI indicators are not showing a meaningful pickup, suggesting a key support for the dollar is missing.
The most effective FX expression of the AI theme is through carry strategies, not by picking individual currencies. FX carry shows a high correlation with AI-beneficiary equity sectors like tech and energy. This allows a broad basket of high-yield currencies to outperform as a group, even those without direct AI exposure.
Foreign inflows into Japanese equities are high, but the FX hedge ratio is only 14%, far below the 50% seen during the Abenomics period. J.P. Morgan estimates every 1% rise in this hedge ratio could push USD/JPY 3 yen higher, representing a significant and overlooked bearish catalyst for the yen.
J.P. Morgan's 2026 outlook is "Bearish Dollar, Bullish Beta," favoring pro-cyclical and high-yield currencies. They expect the dollar's decline to be smaller and narrower than in 2025 unless US economic data significantly weakens, shifting from the more aggressive bearishness of the previous year.
J.P. Morgan maintains a constructive stance on the Eurodollar due to its asymmetric response to Fed pricing. The currency strengthens more when the Fed's terminal rate is priced lower but shows stickiness when it's priced higher, creating a favorable risk-reward profile for bullish positions despite lowered upside targets.