The US Dollar (USD) has become increasingly sensitive to the intra-day moves in US equity markets underlining the increased investor concerns over tech/AI valuations and the potential for a year-end sell-off as risk is reduced. It remains another strong year for the Nasdaq Composite and is 16.2% higher on a year-to-date basis. Since the low-point following the Liberation Day tariff announcements, the Nasdaq is 47% higher. The correction lower now from the closing high is 6.4%, which is the largest correction since the Liberation Day sell-off, MUFG's FX analyst Derek Halpenny reports.

US dollar focus is on equities ahead of Nvidia earnings

"Nvidia will announce its Q3 earnings results later as we draw near the completion of the Q3 earnings season. Q3 results have been solid. As of last Friday, according to Factset, 92% of S&P 500 companies have reported with 82% of those reporting a positive EPS surprise and 76% a positive revenue surprise. Blended earnings growth is running at an annual 13.1%, which if maintained would mark the fourth consecutive double-digit annual earnings growth. The consensus at the end of September was growth of 7.9%. Still, valuations are elevated with the 12-month forward p/e at a lofty 22.4 which is above the 5-year average of 20.0 and the 10-year average of 18.7."

"The focus once Nvidia’s earnings are released later will quickly shift to the delayed September non-farm payrolls data tomorrow. The ADP Weekly data revealed another drop in the 4-week average that is certainly consistent with other data indicating continued weak labour market conditions. But with two further NFP reports likely before the FOMC meeting in December the market reaction will be contained to some degree. But if equities decline further it will certainly raise the prospects of the FOMC agreeing an insurance cut in December, as suggested by Christopher Waller."

"Given the current positive correlation between equities and the dollar (which reflects perhaps the renewed concerns over a tech/AI-specific correction hitting the broader US economy) a bad earnings report this evening could drive the dollar weaker. But the focus will then quickly shift back to the economy and it is the jobs market that will ultimately determine dollar direction into year-end."