Head of FX Strategy
Summary: The ripple effects of Nvidia's exceptional performance extend far beyond individual stocks, resonating across diverse sectors, geographies and asset classes. We look at the impact on the FX markets, where risk-on mood is pushing activity currencies AUD, NZD, SEK and GBP higher while weighing on traditional safe-havens JPY and CHF. Notable FX crosses, such as AUDJPY and NZDJPY, experienced significant gains and NZD crosses could be compelling ahead of RBNZ meeting next week. However, geopolitical developments could be key for momentum extension.
It is remarkable how the performance of a single company like Nvidia can resonate across various sectors and asset classes. Following Nvidia's impressive earnings beat this week, its influence has transcended beyond the realm of individual stocks, impacting broader equity markets. The market's reaction to Nvidia's success has not only bolstered investor confidence in the tech sector but has also contributed to a broader risk-on sentiment and resulted in major US equity indices as well as the Japan markets reaching all-time highs.
The enthusiasm generated by Nvidia's performance has spilled over into the foreign exchange (FX) market as well, via the risk sentiment channel, pushing the risk-on currencies while weakening the risk-off ones.
Risk-on and risk-off currencies refer to currencies that tend to strengthen or weaken in response to changes in market sentiment regarding risk. Here's a breakdown:
Australian Dollar (AUD): The Australian dollar is often considered a risk-on currency due to Australia's status as a major commodity exporter, particularly of metals and minerals. When global economic prospects improve and demand for commodities rises, the AUD typically strengthens.
New Zealand Dollar (NZD): Similar to the AUD, the New Zealand dollar is influenced by commodity prices and global risk sentiment. As a commodity-exporting nation, New Zealand's currency tends to appreciate during periods of optimism and risk-taking.
Canadian Dollar (CAD): The Canadian dollar, also known as the "loonie," is closely tied to the prices of commodities, especially oil. Canada's significant oil exports make its currency sensitive to changes in energy markets and broader risk sentiment.
US Dollar (USD): The US dollar is often considered a safe-haven currency due to its status as the world's primary reserve currency and the depth and liquidity of US financial markets. During times of uncertainty or market turmoil, investors may flock to the USD, leading to its appreciation.
Japanese Yen (JPY): The Japanese yen is another traditional safe-haven currency. Japan is a net creditor nation, and Japanese investors often repatriate funds during times of global instability, boosting demand for the yen and causing it to strengthen.
Swiss Franc (CHF): Like the Japanese yen, the Swiss franc is considered a safe-haven currency. Switzerland's reputation for political stability, strong banking system, and history of neutrality make the CHF attractive to investors seeking safety during turbulent times.
During periods of risk aversion or uncertainty, investors typically seek refuge in safe-haven currencies like the USD, JPY, and CHF, causing them to appreciate against riskier currencies such as the AUD, NZD, and CAD. Conversely, when market sentiment improves and investors become more willing to take on risk, the opposite tends to occur, with risk-on currencies strengthening against their safe-haven counterparts.
Beyond these broader risk-on and risk-off currencies, some of the other currencies could also fluctuate with prevailing market risk conditions. For instance:
Swedish Krona (SEK): As Sweden is a major exporter and closely tied to the global economy, the SEK may strengthen during periods of optimism and weaken during risk-off sentiment.
Norwegian Krone (NOK): Similar to the SEK, the Norwegian krone's performance can be influenced by global risk sentiment and commodity prices, particularly oil. Norway's significant oil exports make the NOK sensitive to changes in energy markets and broader economic conditions.
Gold (XAU): Gold on the other hand is also often regarded as the ultimate safe-haven asset. Its intrinsic value, limited supply, and historical role as a store of wealth makes it attractive to investors during times of uncertainty or market volatility.
Now, bringing this to the current context of Nvidia-driven risk-on to the FX markets. The everything-rally boosted risk-on currencies since the Nvidia earnings release after-close on February 21 and weighed on risk-off currencies. Top performers in G10 were SEK, NZD, AUD while JPY and CHF underperformed. FX crosses are however more interesting especially when we are in a dollar-neutral environment. Nvidia-mania looks set to extend, and market participants may consider the following FX crosses.
AUDJPY is regarded as a key barometer of global risk sentiment. Pair has hit a fresh high since 2014 following Nvidia’s earnings results this week, touching the 99 handle. Further gains could be likely if pair breaks above 99, especially if the AI rally continues. After Nvidia’s May 2023 earnings that could be marked as a start of the AI mania, AUDJPY rose over 7% as shown in the chart below.
AUD is currently also being supported by the upturn in China sentiment. CSI 300 has been up for eight straight trading days, recording gains of over 10% from the lows. Meanwhile, yen remains under pressure due to the Bank of Japan’s sustained easy policies and the volatility in Treasury yields.
NZDJPY remains especially interesting in the current environment, with RBNZ meeting on February 28 looking set to overturn the global dovish central bank sentiment and continuing to send hawkish waves. We talked about the outlier hawkishness in RBNZ in this article, and now also see the improving China momentum and Nvidia-driven risk rally as being further catalysts for NZD.
NZDCHF and AUDCHF are also likely to be boosted in the current risk-on environment. While improving China sentiment could support AUD and NZD, we are also looking for Swiss National bank to cut rates in March, which could add to the pressures on CHF.
GBPUSD could also be a compelling risk sentiment play. We ran a regression analysis of the different FX pairs against the MSCI All-Country World Index (MSCI ACWI) on a quarterly basis over the last two decades to understand which currency pairs could be interesting when market risk sentiment dominates. Some of the charts are shown in the Appendix below. The correlation between GBPUSD and MSCI ACWI came in at 0.66, higher than the correlation shown by AUDJPY (0.651) or NZDJPY (0.619) to the World Index. CADJPY or other high-beta currencies such as NOK and SEK could also be considered.
However, what is surprising is that Gold (XAUUSD) continues to be resilient despite the risk-on environment. My colleague Ole Hansen notes that Gold is buoyed by speculator buying. Also, it may be worth noting that Gold behaves as a safe-haven in times of market stress, but is usually not as closely related to equity sentiment when the mood is risk-on.
While we can expect the AI mania to extend further, it is worth noting that we are in an environment of disturbing geopolitics. In the most recent developments, President Biden has warned of further sanctions against Russia in response to the death of Alexei Navalny, a fierce critic of Russian President Vladimir Putin. We are also at the two-year mark of the Russian invasion of Ukraine, and talk of a Trump 2.0 is picking up as US goes to elections this year. Any escalations could easily bring back a risk-off mood in markets. This is especially important for oil related currencies such as NOK, CAD or AUD.
Other recent Macro/FX articles:
23 Feb: Global Market Quick Take - Asia
21 Feb: Central bank divergence on the radar: Hawkish RBNZ, Dovish BOC and SNB
19 Feb: Macro & FX Podcast: How the debate about the US economy has shifted
19 Feb: Weekly FX Chartbook: Dollar rally looking stretched, bullish signals for NZD
15 Feb: Swiss Franc’s bearish view gets more legs
14 Feb: Sticky US inflation could make dollar strength more durable
13 Feb: Weekly FX Chartbook: US and UK disinflation story in focus, watch for ECB split widening
9 Feb: Japanese Yen is throwing a warning
8 Feb: FX 101: USD Smile and portfolio impacts from King Dollar
5 Feb: Weekly FX Chartbook: More and more reasons to stay long US dollar
1 Feb: FOMC out, BOE and NFP next – will the hawkish waves continue?
30 Jan: USD remains a tough sell even with a dovish Fed outcome
29 Jan: Weekly FX Chartbook: Earnings and geopolitics to take the focus away from Powell
25 Jan: US PCE Preview: March rate cut bets could pick up again
24 Jan: Markets could start to price in a Trump presidency
24 Jan: ECB Preview: Will EUR pay heed to the pushback to April cut expectations?
23 Jan: Podcast: Central banks and key figures run the show
22 Jan: Video: The Curious Investor - Q1 2024 FX and Commodities Outlook
22 Jan: Weekly FX Chartbook: Soft-landing hopes and US exceptionalism will remain at play
19 Jan: A reality check on Bank of Japan’s policy normalization and JPY appreciation expectations
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
