Credit Agricole: FX Risk Index - FJElite
- At -0.7289 (vs -0.5119 last week) our Risk Index has reached its lowest levels since late March 2024. The trend in the Index remains flat.
- According to our FX Risk Index, investors are as euphoric as they were back in Q124 and when global central banks, led by the Fed, were expected to pivot away from rate hikes and towards rate cuts. There was also a Goldilocks period of resilient global growth and softening inflation. The AI investment boom was also gathering steam at the time.
- This euphoria is remarkable given that: (1) the global economy is facing its largest energy shock since Russia’s invasion of Ukraine; (2) investors are pricing in central banks raising rates to head off inflation; and (3) while the AI investment boom rolls on as corporate earnings, especially of US technology companies, remain firm, investors are becoming increasingly more nervous about the large amounts of investment these firms are making in data centres to power their AI models.
- Events in the coming days will test this euphoria. President Donald Trump continues to pressure Iran to make a deal to end their conflict with threats of resuming military strikes against the Islamic Republic. He also continues to say Iran is running out of time to make a deal. NATO is mulling the idea of using escorts to guide merchant ships through the Strait. Nvidia earnings later today will test investors’ faith in the Al boom.
- Weighing on our Risk Index over the past week were lower credit spreads and gold prices as well as the outperformance of defensive stocks by cyclical stocks. Supporting the Index were rising equity and FX market volatility as well as higher EM-Sovereign spreads.
- Among G10 currencies, only the CHF has a significant positive correlation with our Risk Index, while the EUR and GBP have significant negative correlations with the Index.
