JPMorgan’s digital notes tied to dollar vs. euro to leverage up bullish dollar play

By Emma Trincal

New York, Jan. 26 – JPMorgan Chase Financial Co. LLC’s plans to price 0% digital notes due Feb. 14, 2018 linked to the performance of the dollar relative to the euro give investors with a moderately bullish view on the dollar versus the euro a way to enhance their gains, sources said.

The notes will be guaranteed by JPMorgan Chase & Co., according to a 424B2 filing with the Securities and Exchange Commission.

If the dollar gains or remains flat relative to the euro from the starting spot rate to the ending spot rate, the payout at maturity will be the digital return of 10%.

If the dollar depreciates against the euro but the ending spot rate is less than or equal to 108.1% of the starting spot rate, the payout will be par.

Otherwise, investors will be fully exposed to any losses.

Great volatility

Win Thin, currency strategist at Brown Brothers Harriman & Co., said the notes expressed a sideways view on the dollar, which he was not comfortable with.

“We are bullish on the dollar. But FX is so volatile...you can easily have a 15% gain or a 15% loss in a month,” Thin said.

The current spot exchange rate is 1.07. It represents the number of U.S. dollars needed to get one euro.

The notes are a bet on the appreciation of the dollar versus the euro or a decrease in the spot rate. That’s because when the dollar appreciates it can purchase more euros.

On the other hand an increase in the spot rate would represent a depreciation of the dollar versus the euro.

Applying the current rate of 1.07, the level at which investors in the notes would breach the barrier and lose money would be a 1.15 rate.

“In FX, rates can drop like a stone. You could see the dollar jump much more than 10% or drop more than 7%,” he said.

Sideways view

Brown Brothers Harriman is bullish on the dollar. The firm expects an appreciation of approximately 12% over the next 12 months.

Even if the expected appreciation is not much higher than the 10% digital payout, Thin said that he still feels that his options are limited and the risk too great.

“This would be good for someone who sees a sideways market. I see great volatility. I get capped at 10% with the whole downside if I breach the barrier,” Thin said.

“We just had this volatility spike with Trump and we’ll continue to see a lot of volatility.

“Between zero and 10% you get a little bit of a kicker and then you’re capped.

“I just think the parameters are too binding.”

Euro bears

Juan Perez, foreign exchange trader at Tempus, Inc., was moderately bullish on the dollar. He reasoned that the euro was not about to collapse a year from now as some dollar bulls expect ahead of a series of political elections or events to take place this year in the European Union.

If he is right and the euro declines only moderately versus the dollar, the notes could offer an attractive payout.

“A 10% return based on a rising dollar versus the euro is quite significant,” he said.

One aspect of the bet on this currency pair is a gloomy outlook on the European Union, which drives many dollar bulls, he noted.

Perez said he is not one of them, although he emphasized some of the risks that may dampen the euro in the coming months.

He cited the Dutch general election in March and the presidential elections in France in April-May.

The main downside risk to the euro was political: an “anti-trade, anti-establishment,” movement following the example of Brexit in the U.K. and the elections of Donald Trump in the U.S. may create a “domino effect” leading some countries to vote themselves outside of the European Union, he said.

“The world is going further to the right and more voices are calling for an exit from the Union,” he said.

If such developments occur, many predict a collapse in the euro versus the dollar.

However, Perez was confident that those fears were overblown. The euro zone could surprisingly be more resilient than expected, he said.

Resilience

“There is an opposition that’s building up, which may frame its argument to maintain the European Union model, with its open trade, open borders foundations,” he said.

“I’m relatively optimistic that Europe can hold itself together in the next 12 month.”

Perez said the dollar within the one-year term of the notes could appreciate in a 2% to 5% range.

This would make the 10% digital payout all the more attractive.

“I don’t think it’s a bad bet,” he said.

J.P. Morgan Securities LLC is the agent.

The notes will price on Jan. 27.

The Cusip number is 46646QVX0.

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