PoundSterlingLIVE - The chatter in FX circles this week has centred around whether the investor lust for Nvidia (NASDAQ:NVDA) shares is spilling over into currency markets.
We noted that Thursday's pullback in the Pound to Dollar exchange rate was centred around the U.S. stock market open that saw billions flow into AI darling Nvidia, offering a hint that demand for U.S. equities is driving USD demand.
Now, analysis from Crédit Agricole suggests these suspicions are well founded.
"One of the more interesting developments in FX markets since the start of 2024 has been the close correlation between the USD and the US equity markets in general – and the stocks of the “Magnificent 7” technology companies in particular," says Valentin Marinov, head of FX research at Crédit Agricole.
Crédit Agricole's FX team concludes that the performance of U.S. tech stocks seems to be driving at least some of the recent USD performance.
"The conclusion is further corroborated by the results of our analysis of ETF flows, which suggests that the bulk of the foreign inflows into the US stock market ETFs have been unhedged. Indeed, we think that recent unhedged US stock market inflows gave the USD a boost while the bouts of currency weakness we saw could be due to foreign selling of US (technology) stocks," says Marinov.
But, looking ahead, Crédit Agricole reckons there is a limit to how much the equity market outperformance could support the USD.
"Indeed, the approaching February month-end could see USD-selling from real money investors who rebalance their global equity portfolios. Indeed, we note that months during which the global stock markets have rallied typically saw the USD come under pressure at month-end on the back of rebalancing hedging flows," warns Marinov.
An original version of this article can be viewed at Pound Sterling Live