Financial markets have calmed a little after CoreWeave () stock bounced on Thursday. But the debate between intensifying price pressures needing tighter monetary policy and a tech correction requiring a softer policy outlook continues. Expect more consolidation in FX markets today and more interest in local stories, such as Indonesia’s equity travails
USD: What Does the Flatter Yield Curve Mean?
The sell-off on Coreweave assets saw a modest reversal yesterday after Nvidia’s CEO, Jensen Huang, said that Coreweave’s financial strength was improving and its cost of capital was declining. Perhaps those comments should not be surprising from a major shareholder in Coreweave; let’s see how long this bounce in Coreweave assets lasts. The big takeaway this week has been the recovery of the long-end of the US Treasury market, even as inflation data continues to come in hot. Here it seems that investors are starting to find value in long-dated Treasuries and are viewing those as a middling hedge against a correction in the AI trade. Were the tech sell-off to gain momentum, that Treasury buying would move to the shorter end of the curve.
While fears of an AI correction may be growing, inflation data continues to come in hot. Yesterday it was US September data blowing away consensus. And today, import prices should come in near 8% year-on-year, the highest since summer 2022. Inflation data is keeping short-dated interest rates supported and has delivered a near 20bp flattening in the 2-10 year Treasury curve this week.
What does that mean for FX? Typically, an environment where the Fed is applying the brakes while growth prospects are being revised down is good for the dollar against activity and emerging market currencies. It is only when short-end rates break lower that the dollar is ready to drop. And we are not there yet.
Barring another big leg down in AI stocks and risk assets in general, expect the dollar to consolidate near recent highs. We would continue to expect some defensive outperformance of the Swiss franc in this environment. will probably struggle to get above the 102.40/50 area now, while support is 101.75/80.
EUR: Inflation to Be Confirmed at 3.8% Today
Today’s eurozone data should see September confirmed at 3.8% – well above the European Central Bank’s 2% target. Markets are still reeling from the hawkish set of inflation forecasts delivered at the ECB September press conference, a key driver of the near 75bp of further tightening expected from the ECB. Our team looks for just one more hike, however, and developments in French bond markets will have a big say in whether the ECB needs to tighten much more from there.
has received a lift from this week’s unease in US AI stocks and may be entering a decent consolidative phase now. This could be worth a move all the way to 1.1340/50. But do not expect EUR/USD to be the big outperformer on a further US equity correction. We think a lower would take the lead there.
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