- Today, 08:00
- FX
A delayed reaction to the Democrat blue wave has seen some powerful selling of tech stocks. A little surprisingly, the reaction in FX markets has remained very muted. FX participants so far see this as an idiosyncratic re-pricing of the tech sector, rather than a harbinger of recession. Expect defensive FX to outperform, rather than a broad dollar decline
USD: Payrolls can provide the dollar some support
We have all seen big falls in tech stocks on the back of the threat to data centres. The fact that the equity sell-off spread to the defensive sectors of consumer staples, utilities and healthcare serves as a warning that an asset management industry underweight in cash may be tidying up positions into year-end. After all, most global benchmark equity indices, apart from China, are still in the green on a year-to-date basis.
FX markets have reacted to the equity sell-off in a typically defensive, but muted way. In the G10 space, the high beta Australian and New Zealand dollars are underperforming, while the defensive Japanese yen and Swiss franc are in demand. However, the moves have been small. So far, it seems FX participants are prepared to see the tech sell-off as an idiosyncratic story on the back of the Democrat blue wave, rather than a major macro setback. Notably, the Philadelphia semiconductor index trades on a 61% one-month implied volatility compared to just 7% for USD/JPY. This may help investors to see FX markets as a less correlated asset class compared to the wild swings in tech.
Where we have seen the highest correlations in FX are places like the Israeli shekel. Local investors run high FX hedge ratios on their US investments and will now be in the process of buying back dollar hedges on their shrinking US tech portfolios.
The big question for the dollar is whether this tech sell-off leads to a broader re-assessment of the US growth and inflation trajectory. US short-dated rates have fallen close to 50bp since late September and the dollar's yield advantage over other major pairs has softened a little. Feeding into that story today will be the October US jobs report. Second-tier US job indices this week have all come in on the strong side and there seems to be no reason to expect a soft jobs figure today. The whisper number currently stands at +82k versus last month's soft reading of +29k.
A decent jobs number today will confirm the Fed's understanding that the US jobs market is 'solid' and could provide some support to short-dated rates and the dollar. We still think it is too soon to call a broad-based dollar decline and that defensive positions in FX markets will be expressed through cross rates like a lower AUD/JPY or in the emerging world with a weaker South African rand or Mexican peso (see below).
The DXY dollar index is being remarkably resilient and can continue to trade towards the middle of a 101.50-102.50 range. Clearly, the dollar's liquidity advantages and near 4% one-week deposit rates are helping here.
EUR: Unimpressive
It has been a rather unimpressive performance from the euro. We know that the European buy-side is running low hedge ratios on its US investments. Yet a large US tech sell-off is still not enough to prompt much EUR/USD buying at all. It seems that global investors are more than happy to leave their cash in dollars for the time being. In other words, we are seeing a rotation into cash and not out of the dollar. Helping that story is the return to more familiar correlations, where US Treasuries are now performing their safe haven role.
Barring a soft US jobs report today, expect EUR/USD to consolidate not far from 1.12. On the eurozone calendar today is ECB Chief Economist Philip Lane at 10:30 CET. The market still prices 18bp of ECB hikes in December and that should remain sticky unless we see a much deeper equity correction.
A hawkish Bank of England can see sterling continue to outperform. The prospect of UK inflation heading up towards 5% in the second quarter next year makes BoE hawkish pricing quite resilient. EUR/GBP has overshot rate differentials down at these low 0.83 levels, but there seems to be no reason to expect an upside correction just yet.
CEE: NBP and CNB have swapped roles
The main takeaway from the Czech National Bank meeting yesterday was the 4-3 split within the board, following a long period of a strong majority. The market interprets this as a dovish signal, suggesting the CNB is unwilling to hike rates further unless the inflation situation deteriorates significantly. For the first time since the onset of the US-Iran conflict, the CNB’s forecast aligns closely with market pricing, with the PRIBOR rate peaking at around 4.55%. However, inflation is expected to worsen over the remainder of the year, approaching 3% and nearing 4% in 27Q1. We do not believe the current shift in energy prices justifies such a rally in CZK rates. Consequently, we view two additional rate hikes as the minimum the market will tolerate, and we anticipate a hawkish repricing.
EUR/CZK is facing renewed upward pressure. Indeed, if we take the shift in rate differentials at face value, the rates point toward 24.450. However, as previously noted, rates are likely to correct, as the current rate differential is too tight. Furthermore, the koruna benefits from strong seasonal support in November and December, which should help temper the current weakening pressure following the dovish CNB meeting. We therefore anticipate a new range of 24.350-24.400, little changed from our pre-meeting expectations.
The National Bank of Poland press conference marked a shift from a dovish stance toward a more hawkish or cautious approach. Although the governor indicated that interest rates would remain unchanged in December, he noted that inflationary risks are accumulating and that the MPC is becoming more hawkish. This aligns with our baseline scenario, which anticipates a rate hike in the first quarter of 2027. However, PLN rates underperformed relative to the rest of the region yesterday. It appears the NBP remains sensitive to the GDP outlook, with government-imposed price caps set to be a key factor.
For now, it is clear that the zloty may receive some support from the NBP’s shift toward a more hawkish stance. Nevertheless, global factors remain the primary driver; yesterday’s trading saw a rapid swing back to risk-off sentiment, renewing pressure on CEE currencies. EUR/PLN is expected to settle somewhere within the 4.400–4.410 range.
MXN: Banxico happy to let the peso drop
In a surprise move, Banxico voted 3-2 yesterday to cut its policy rate to 6.25%. This narrows the Banxico-Fed policy spread to a mere 225bp – the lowest in decades. Banxico is clearly focused on weak growth in Mexico and the negative output gap. It is not worried about the weaker peso contributing to higher inflation, given its view that pricing power for the consumer sector is very weak.
In a world where central banks are tightening to ride out the inflation hump, Banxico really stands out now. Its position leaves the peso very vulnerable to any pick-up in external risk and USD/MXN pushing above 19 seems more likely than not.
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