In recent discussions within the foreign exchange (FX) community, there is a growing debate on whether the fervor for Nvidia shares among investors is transcending into currency markets. This week’s attention has been drawn to the notable pullback in the Pound to Dollar exchange rate on Thursday, coinciding with the U.S. stock market’s opening, where substantial investments flowed into the artificial intelligence frontrunner, Nvidia. This occurrence hints at a possible scenario where the demand for U.S. equities is influencing the demand for the U.S. Dollar.
FX Correlation with U.S. Equity Markets
Analysis from financial institutions, Crédit Agricole and HSBC, supports the notion that the connection between Nvidia’s performance and the USD is not merely speculative but has tangible underpinnings. Valentin Marinov, the Head of FX Research at Crédit Agricole, observes, “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.”
According to Crédit Agricole’s FX team, the surge in U.S. tech stocks appears to be influencing a portion of the recent USD performance. Marinov emphasizes, “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.”
Limitations and Future Outlook
Despite the current correlation, Crédit Agricole anticipates limitations to the extent of how much the equity market outperformance can prop up the USD. Marinov warns, “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.”
Shift in Market Dynamics
HSBC’s FX researchers also detect a shift in market dynamics, observing that U.S. equity market gains are now playing a supportive role for the Dollar. Daragh Maher, Head of FX Strategy at HSBC, notes, “During much of 2023, the correlation between the USD and equities was notably inverse with the USD’s role as a safe haven the dominant consideration.” However, Maher points out that this connection has weakened, with equities and the USD correlations moving towards zero.
In conclusion, the evolving relationship between U.S. tech stocks, particularly Nvidia, and the USD is becoming a focal point in FX discussions. Analysts are closely monitoring this correlation and its potential implications for currency markets, acknowledging the shifting dynamics that challenge traditional market relationships.
