Investing.com – Foreign exchange markets have seen a lot of volatility over the past few weeks, leading JPMorgan to revise its dollar forecast.
July and August will go down as some of the most memorable episodes of economic and political volatility in recent history, analysts at JPMorgan Chase said in an Aug. 14 note.
“Over the course of six weeks, investors have witnessed a replacement of a US presidential candidate, an assassination attempt, a +10% rise in the TWI (trade-weighted index) for the Japanese yen, a massive Fed rate cut in September, and an intraday surge that was the largest since 1990, among other events,” the bank said.
The bank added that the foreign exchange response was clear although the dust has not yet fully settled, but the broad outlines point to low-yield short-term covering, weak high-yield/pro-cyclical performance, and a volatile but net weaker US dollar.
The main victim of the rise in volatility has been foreign exchange, which will find it very difficult to regain the dominant position it has enjoyed over the past 12-18 months.
Trading returns have been wiped out since the start of the year, and various bank agents for broader trading positions indicate that 65%-75% of those positions have now been liquidated.
The dollar’s response to all this was somewhere between expected and somewhat disappointing, the bank added, as the 100 basis point rise in the US short-term securities market was too much for the dollar to ignore.
JPMorgan has cut its USD/JPY forecasts, particularly through the pair. It now expects its USD/JPY forecast through Q4 2024/25 to be 146 and its Q2 2025/25 forecast to be 144, from 147.
“We still see reasons to be optimistic about the USD outlook overall: 1) the US labor market is weakening but other data since then has been good; 2) the cyclical data over the week is not strong enough to push the USD lower; 3) the USD historically tends to consolidate after such large interest rate swings; 4) the USD upside risks from the US election remain; and 5) the August seasonality tends to support the USD,” JPMorgan added.