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J.P. Morgan FX Outlook Summary (Jan 18, 2025)

Key Points

• Trump Administration Actions: Expectation of 100+ Executive Orders (EOs) on Day 1, with focus on tariffs, border security, and immigration. Tariffs are a primary driver for currency markets, potentially straining USD due to retaliation risks; border security EOs could impact risk sentiment and benefit low-yielding currencies like JPY and CHF.

• Market Expectations: USD expected to remain bullish based on valuation buffers (e.g., CNY and CAD low tariff risk), but with caveats. Option markets show elevated event risk premium, comparable to election periods. If no concrete tariff announcements in Week 1, delays may not negate tariffs, and USD could climb if policy agenda persists.

• Currency Impacts:

  • USD: Strong outlook driven by US resilience and tariff rhetoric, but valuation could weaken if global growth deteriorates.
  • CAD: USD/CAD may breach 1.50 if 25% tariffs on Canada; recession risks could amplify impact. Prolonged tariffs could push CAD below 1.55-1.58 in severe scenarios.
  • JPY: Expected to appreciate if BOJ hikes (dovish hike anticipated), potentially stabilizing longer-term; de BoJ impact could limit gains.
  • GBP: Bearish due to risk sentiment from potential UK fiscal instability; bearish theme supported by weak retail and GDP data.
  • EUR: Shorts likely to cause dislocation; spillovers from US tariffs could worsen Eurozone economics and GBP/USD.

• Investment Strategy: Portfolio construction to hedge uncertainty; trade ideas include: adding short CAD/JPY, short GBP vs SEK/USD, staying short EUR vs USD. Long USD TWI as diversifier, but hedged with GBI US bonds.

Market Risks

• Uncertainty from tariff outcomes, border security measures, and global trade war risks could challenge USD and amplify currency devaluations in traded-exposure countries like Canada and Mexico.
• Asymmetric Shorts in GBP remainbearish; retaliation risks could limit USD strength.

Supporting Data

• Executive Orders expected: Average EOs per year under Trump exceeds historical norms since 1950s.
• Valuation buffers: USD TWI discount suggests opportunity, counterbalanced by event risks.
• Next week events: Trump inauguration, BOJ potential hike, PMI releases to watch.

Conclusion

The US-led policy shift risks introducing significant FX volatility, with tariffs as key drivers. Market participants should focus on portfolio hedging and currency-specific risks, particularly CAD and GBP vulnerabilities to US actions.