Weekly Market Update 13 March – Dollar pared gains to close the week above 104, after Silicon Valley Bank’s collapse revealed fragility in the financial system
Weekly Market Update 13 March – Dollar pared gains to close the week above 104, after Silicon Valley Bank’s collapse revealed fragility in the financial system
1. The dollar index pared early gains to end the week almost flat at 104.6, as SVB’s collapse overshadowed Fed Chair Powell’s testimony and Friday’s jobs report. On Tuesday and Wednesday, Powell was hawkish in his testimony in front of the US Congress. He stated that not only was the peak interest rate looking higher than expected, the Fed was also open to increasing the pace of rate hikes at this month’s meeting. Friday also saw strong employment growth, with 311k new workers added in February, above market expectations of 224k but below January’s extraordinary 504k. There are signs that the labour market is cooling, after hourly wages grew slower than expected, 0.2% compared to 0.3%, while unemployment inched up to 3.6% from a forecasted 3.4%. However, SVB’s failure has unnerved markets, which have reversed bets on the peak rate hitting 5.7%. Markets now expect a peak rate of 5.3%, with traders pricing in a rate cut later this year. A 25bps rate hike is also considered more likely at this month’s Fed meeting, when markets earlier gave a 75% chance of a 50bps hike. As the Fed rolls out an emergency plan to backstop banks, promising protection for all SVB depositors, the dollar is expected to continue experiencing selling pressure in the short-term. Inflation data is also due this week, which will affect the Fed’s decision on the rate hike.
2. The euro pared losses to end the week slightly up at 1.06 against the dollar, after the mixed employment numbers in the US on Friday. The ECB is all but set to raise rates by 50bps this Thursday, after repeated pronouncements from different ECB officials. There are growing signs of a rift between the hawkish and dovish camps in the ECB, with Holzmann arguing for 4 consecutive 50bps rate hikes from now till July, while Visco called for prudence given the uncertain macroeconomic future. Traders are looking closely to Thursday’s meeting, as the ECB is expected to release its inflation outlook which would indicate how much room exists for further rate hikes.
3. The pound sterling retraced to end the week flat against the dollar at $1.20, as the UK economy grew 0.3%, above market expectations of 0.1%. The services sector grew by 0.5%, from a 0.8% decline in December, while production fell by 0.3% after a 0.3% rise in December while construction fell 1.7% after remaining unchanged in December. Unemployment claims and wages are due on Tuesday, which markets expect to show a slowing economy. UK’s chancellor Hunt will also give his budget statement this Wednesday, where tax cuts, if any, are expected to be temporary and small.
4. The commodity currencies all weakened against the dollar, as news of SVB’s collapse was not enough to outweigh the dollar’s strength earlier in the week. USD/CAD closed at $1.38, as the loonie weakened against the dollar after the BOC decided to hold rates steady at last week’s meeting. The BOC is the first major economy to pause its rate hikes, which could cause it to weaken further in the current rising rate environment. The aussie closed at $0.66 to the dollar, while RBA’s governor Lowe said that the bank was getting closer to the peak rate. Australia’s employment numbers and wage growth are due on Thursday. Elsewhere, the kiwi pared gains to hit $0.61 against the dollar, with q/q GDP due on Thursday. The Fed stepping in to help SVB has left investors wondering whether further rate hikes are in store.
5. Brent crude slumped to $82 per barrel, as macroeconomic factors influenced its price. Despite markets believing that the Fed will continue with smaller rate hikes now, it was not enough to give traders confidence that demand would rise. China’s modest growth targets and the smaller-than-expected rebound in international travel has kept a lid on prices, while the supply of Russian oil remains robust, causing downward pressure on prices in the near-term. Meanwhile, gold rallied to $1870 per ounce, as markets priced in a rate hike of 25bps by the Fed this month, a reversal from the 50bps before SVB’s collapse. The uncertainty generated by SVB’s collapse also buoyed demand for the bullion. Still, the inflation data due this week could shift the Fed’s stance on how much to hike rates by, which affects the attractiveness of non-yielding bullion.
