The yen and Swiss franc have taken over as the preferred safe-haven currencies, as the US dollar struggles amid growing concerns about artificial intelligence. This shift comes as global equities faced a rough session yesterday due to higher oil prices and AI-related worries. The dollar's safe-haven appeal has waned, with the yen and Swiss franc benefiting from the defensive rotation.
The negative correlation between bonds and equities is strengthening, influencing FX markets. The 10-year Treasury yield dropped below 5.0% for the first time in a month, indicating reduced sensitivity to higher oil prices. The 2-year SOFR swap rate also fell 15 basis points to 4.50%, suggesting that equity jitters are weakening market expectations of a large Federal Reserve tightening cycle. However, the likelihood of a December Fed hike remains high, which could limit significant USD corrections.
In Europe, the euro's sensitivity to France could quickly return if the OAT-Bund 10-year spread widens further. The spread closed at 174 basis points after reaching 178 basis points yesterday. The euro remains unattractive across the board, and EUR/CHF is seen as the cleanest way to play European sovereign risk. Today's focus will be on global equities, France, and oil, with PMIs playing a secondary role.
In the CEE region, global risk-off sentiment is weighing on currencies. The Czech koruna is showing resilience, with EUR/CZK and EUR/RON reaching previously discussed targets. The Polish zloty and Hungarian forint remain vulnerable due to high energy import exposure and rising energy prices. The Mexican peso is the worst-performing EM currency, close to 8% weaker against the dollar, due to dovish Banxico rhetoric and potential AI-related unrest.