FX Macro Quant US payrolls next catalyst for carry-to-value ...-110580735

Global FX Strategy03 October 2024J P M O R G A Nwww.jpmorganmarkets.comGlobal FX StrategyAntonin T Delair AC(44-20) 7134-4643antonin.t.delair@jpmorgan.comJ.P. Morgan Securities plcKunj J Padh(1-212) 834-5108kunj.padh@jpmchase.comJ.P. Morgan Securities LLCJoyce Lai(44-20) 3493-5891joyce.lai@jpmorgan.comJ.P. Morgan Securities plcMeera Chandan(44-20) 7134-2924meera.chandan@jpmorgan.comJ.P. Morgan Securities plc•Our USD growth strategy currently has a 0% weight allocated to the dollar. Few currencies are showing strong growth momentum on either side.•More G10 currencies are starting to screen as somewhat rich on long-term metrics. These currencies include AUD (+5%), GBP (+4%), and NZD (+4%).•While we had previously argued that the carry-to-value rotation may see a short-term breather between the Fed first cut and the next US payrolls (Oct 4th), we note that (1) this window proved to be very short-lived (only ~4-5 days), and (2) the effect was most obvious for G10 carry but not so much for Global or EM.•We continue to look for the carry-to-value rotation to play out further over the long-term as Fed easing should continue to benefit cheap low-yielding currencies, but a firmer US payrolls print would move macro markets to price less immediate easing from the Fed which could disrupt the FX value trade (with G10 carry outperforming). On the other hand, a softer print, in line with our economists views, is needed to trigger further rotation.•Indeed, carry has shown a positive correlation to the magnitude of the surprise in non-farm payrolls during this cycle, though the relation is partially biased by the very-positive carry performance over the 2yr lookback period and large above consensus payrolls misses of 2022 and early 2023.•In early September, we flagged that more drivers had started to impact the relative performance of currencies than just the carry-to-value rotation. Specifically, we highlighted that commodities and relative growth momentum had again become important drivers. This trend has since extended further, with commodities in particular seeing a boost from recently-announced China stimulus and growth RV (via our J.P. Morgan FRIs) ranking among the most consistent signals this year.•Our T.E.A.M. strategy maintains a defensive carry exposure via the Asia carry trade. CNY shows the most positive 2w change in the composite score amidst tailwinds in equity inflows following recent stimulus announcements. SEK is currently the favored currency to balance the pro risk/carry exposure. Figure 1: Global carry returns show a positive correlation to the magnitude of the surprise in headline non-farm payrolls during this cycleX: Surprise on headline non-farm payrolls (first release less consensus expectations); Y: Following global nominal carry basket returns (until next payroll release). Period is 2022-now.-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%-100-50050100150200250300350400Following Global Carry PerformanceUS payrolls: actual first release - survey (k)Sourc