Newsletter · · Ashutosh Agarwal

Carry Still Pays but Now Funded in Euros Francs and Yen Not Dollars - EM FX - Week of July 3, 2026

EM FX for the week of July 3, 2026. The dollar bull is back and JPMorgan's desk now runs long dollar and long carry at once by funding in euros, francs and yen, the yuan sits as the anchor under the whole complex, and commodities do the heavy lifting for the exporters.

EM FX

Week of July 3, 2026: Carry Still Pays but Now Funded in Euros Francs and Yen Not Dollars

The setup EM bulls have leaned on all year, a soft dollar lifting every high-yielder in sight, got quietly turned on its head this week. The desks that matter are now leaning long the dollar, not short it. And yet nobody is abandoning carry. The trick, they argue, is simply to stop funding it in greenbacks. Subtle shift, but it changes how you build the book.

TL;DR

  • J.P. Morgan's FX desk is now running a "bullish beta" call, long dollar and long carry at once, and reconciles the two by funding carry in euros, francs and yen, not dollars.
  • The yuan is the whole complex's anchor. Dollar/CNY ticked up this week (fixings briefly above 6.82) on dividend-season outflows and profit-taking on crowded longs, but the desk still reads the medium-term trend as intact, a "healthy rinse," not a break.
  • Commodities are doing the heavy lifting for the EM story: Brent seen holding around $86 in Q3 and copper eyed toward $15,000/t, a tailwind for the energy and metals exporters, a tax on the importers.

What's New

The dollar bull is back, and it isn't killing carry. On At Any Rate, Global FX: Mid-Year Outlook pushbacks, payrolls, CNY, GBP (Jun 26), J.P. Morgan Co-Head of FX Strategy Meera Chandan laid out the house view plainly: bullish dollar and bullish carry. She's lowering the euro/dollar target toward 1.10 (against fair value near 1.11), arguing the rates repricing, roughly 40bps of Fed hikes now in the curve, hasn't shown up in FX yet. The reconciliation, and the actionable bit: "the carry trade is actually best expressed through non-dollar funders," euro, Swiss, yen. That's the trade of the week.

The yuan did something, and everyone noticed. Same episode, Co-Head Arindam Sandilya on the dollar/CNY pop: spot up about three-quarters of a percent, fixings briefly above 6.82, with "a lot of profit-taking and protection buying on cash bullish CNY positions." He pins it on seasonal dividend outflows ($65–70bn on paper) and narrative rather than any regime change, the right lens, he argues, is China's balance of payments, and that still points to more CNY demand than supply. His read: spot can drift higher into the outflow peak, but "net-net… it looks to me like a healthy rinse."

CNY is the domino for the entire complex. On Making Sense, 2026 Mid-Year Outlook: Resilient growth, sticky inflation, shifting policy (Jun 29), Chandan made the systemic point explicit: dollar/CNY heading lower has been "one major anchor for the dollar complex as a whole," and if China shifts its stance and lets the yuan weaken, the spillover across global FX would be "pretty large." File that as the single biggest tail risk sitting under every EM-carry book.

The split is commodity-driven, not country-driven. Chandan's H1 post-mortem (same episode): the broad dollar was roughly flat trade-weighted, but underneath it energy importers, a lot of Asia, got hit while the high-yielding commodity and energy exporters, she named Brazil plus idiosyncratic Hungary, did the work. Same fault line she expects to run through the second half.

Retail's version of the same story. For the importer side of the ledger, InvestTalk, Should You Hedge Currency Risk? The Dollar, Yen, and Rupee (Jun 27) put it in plain English: a rising dollar tightens financial conditions abroad, and oil-importing economies like China and India "have to raise rates to defend their currency, prevent capital flight," which slows growth and caps equity valuations. Pundit commentary, not a desk call, but it's the right mental model for the rupee's managed grind.

The Debate

This is where the tape is genuinely two-sided.

The constructive case is J.P. Morgan's: firm inflation, higher-for-longer central banks and decent growth mean "investors in FX space are going to be searching for carry" (Chandan, Making Sense). Fund it in low-yielders and a hawkish Fed becomes a feature, not a bug.

The caution came from the same desk, which is the honest part. At Any Rate spent its opening on client pushbacks: if 1.5 hikes are priced, is the risk-reward still there? Can high-yielders survive a hiking Fed? Their own answer is "it depends… versus what," and they concede that on a broad-based Fed hike the dollar strengthens against everything, high-yielders included. Layer on the profit-taking in crowded CNY longs and Chandan's CNY-domino warning, and you have the bear case in embryo: a book leaning the same way, one policy shift away from a rinse. What the pods did not voice this week was the classic "soft dollar makes EM the trade of 2026" bull, that premise just got flipped.

The Trades in Play

  • Carry, funded right. Long high-yielders vs. EUR/CHF/JPY funders, not vs. USD (At Any Rate). Within DM, JPM still likes AUD and NOK as the top yielders; on the EM side the exporters, Brazil and idiosyncratic Hungary, screen best.
  • Short euro. EUR/USD toward 1.10 is the cleanest expression of the US-exceptionalism call (both JPM episodes).
  • Mind the yen line. Dollar/yen printed 162.40 and MoF's Katayama sounded distinctly un-urgent, "communication has been stable," will "respond appropriately," on Saxo Market Call, Leverage upon leverage, what could go wrong? (Jun 30). But JPM's mid-160s target sits right at intervention risk. A yen funder is cheap until it isn't.
  • Next data point: US June payrolls. Patrick Locke (At Any Rate) says forget the headline: the unemployment rate and wages are the arbiters of whether the Fed stays uncomfortable.

Read-Throughs

  • Commodities are the EM tailwind. On Making Sense, Greg Scheer sees Brent averaging around $86 in Q3 and $80 in Q4 (above the forward curve) and copper pushing toward $15,000/t on a China-led industrial upturn and a US refined-copper tariff tug-of-war. That's fuel for the energy and metals exporters (read Brazil and the commodity currencies) and a headwind for Asian importers and energy-importing EMB credits.
  • Gold's in a "deeper freeze." Scheer says a hawkish Fed has frozen the structural gold trade while hikes loom, a quiet drag on the gold/PGM-levered rand, even though nobody named it directly this week.
  • AUD is still the China proxy. Saxo flagged it testing its 200-day moving average (~68.75) with the year's low at 68.33; JPM still likes it on carry. Whichever way copper and the yuan break, AUD is your liquid tell.
  • Euro cycle = CE3's tide. A euro grinding toward 1.10 is a modest headwind for the PLN/HUF/CZK bloc that rides its coattails, worth a watch, though the pods didn't dwell on it.
  • The dollar regime itself. CNY is the anchor (Chandan): a lower dollar/CNY has capped the broad dollar, and a policy-driven turn higher is the release valve that would hit the whole EM complex at once.