Quantitative models relying on momentum in equities, commodities, and rates are underperforming because the performance gap (dispersion) between assets has collapsed. This creates a low-conviction environment unfavorable for relative value trades and non-carry macro trends in the FX market.
Despite a surge in AI-related capital expenditures that highlights the U.S., Taiwan, and surprisingly Sweden and the UK, this investment trend has not yet become a significant driver of currency returns. For now, it's considered a minor tailwind rather than a game-changing factor for FX markets.
Unlike the 2018 shutdown, the Bureau of Labor Statistics may not have funding this time, potentially halting the release of non-farm payrolls and CPI data. This would leave the highly data-dependent Federal Reserve and markets "flying blind" at a critical monetary policy juncture.
A recent White House memo indicates that employees in departments reliant on discretionary funding could be permanently dismissed, unlike typical shutdowns where workers are furloughed and retain jobs. This introduces a new, more severe labor market risk that could negatively impact the dollar.
While still profitable, FX carry trades have become more cyclical and less of a diversifier. They now exhibit a high correlation (~0.5 beta) with the S&P 500 and offer significantly lower yields (7% vs. 11-12% previously), increasing their risk profile in a potential market downturn.
While fundamentals favor buying the Euro on dips, a strong U.S. payrolls report is unlikely to cause a major sell-off. The speaker is more concerned about a potential geopolitical escalation involving Russia, which could trigger a much larger, 3-5 cent decline in the currency pair.