Credit Ágricole: FX Risk - FJElite

Rising oil, food and copper prices are pushing global yields higher as investors factor in higher inflation and tighter monetary policy. This price action is putting the brakes on investors’ risk-seeking behaviour. While investors are not yet exiting risk-correlated trades, they are currently not adding significantly to them either.

Eyes will remain on the Middle East. While President Donald Trump has committed to economic sanctions against Iran, the two sides continue to exchange tit-for-tat military strikes signalling to investors there is unlikely to be a resolution to the closure of the Strait of Hormuz anytime soon. This scenario will keep oil prices elevated.

Meanwhile growing risks of a super El Nino are pushing food prices higher and supply-side constraints as well as the threat of US tariffs on refined copper imports are pushing copper prices higher threatening growing costs in the AI build out. Investors will be eyeing the US CPI reading later this week to gauge the risk of higher rates in the US.

Rising global yields are unfriendly to risk, especially when Investors have been piling into Al-related companies that rely on future earnings to justify elevated valuations. Higher discount rates hurt the mathematics of these trades. The unwinding of JPY-funded carry trades is further evidence that investors are reconsidering their risk allocations amid higher global yields.

Rising FX volatility, commodity prices and private credit spreads along with the outperformance of cyclical stocks by defensive stocks pushed our Risk Index higher over the past week. Falling equity market volatility and EM-sovereign spreads capped the Index’s gains.

Among G10 currencies, only the CHF, CAD and SEK have significant positive correlations with our Risk Index. The JPY’s positive correlation with the Index continues rising which signals a return of some of its safe- haven status. The GBP and USD have significant negative correlations with the Index.