Weekly Market Update 20 March – Dollar slides below 104 after central banks act to provide liquidity in cautiously optimistic markets

Weekly Market Update 20 March – Dollar slides below 104 after central banks act to provide liquidity in cautiously optimistic markets

1. The greenback closed the week at 103.8 against a basket of currencies, gaining ground from a midweek low of 103.4 but below the week-high of 105. The dollar initially rose on news of distress at Credit Suisse, as its biggest shareholder Saudi National Bank rejected the notion of injecting liquidity, causing investors to flock to the dollar as a safe haven. However, the dollar began falling after major US banks banded together to provide First Republic Bank US$30 billion in deposits, shoring up confidence in the US banking system and staving off a bank run on First Republic for the time being. The ECB also hiked rates by 50bps at its latest meeting despite some European banks’ exposure to Credit Suisse’s business, leading to further weakness in the dollar. This week will see the Fed release its decision on the interest rate, with market watchers expecting either a pause or a 25bps rate hike. However, a tough choice awaits Fed chair Powell, who has yet to quash inflation after core CPI m/m re-accelerated last week to 0.5% from 0.4%, but is now faced with a lack of liquidity after banks accessed a record $152 billion from the Fed’s discount window.

2. The euro ended the week flat at 1.06 against the dollar, after paring early losses from the Credit Suisse crisis. Despite a backstop by the Swiss National Bank and Finma, the Swiss financial regulatory authority, Credit Suisse had to eventually be bought by rival UBS in a takeover deal hastily assembled over the weekend. Even in the uncertain banking climate, the ECB pushed on with its heavily-signalled 50bps rate hike last Thursday, providing support to the euro while also indicating confidence in the European banking sector. This week will see ECB President Lagarde speaking on multiple occasions, while services and manufacturing data are due.

3. The pound sterling rallied to end the week near $1.22 against the dollar, after investors were reassured by the $30 billion liquidity injection by major banks into First Republic. Markets also took comfort from Chancellor Hunt’s remarks that the UK would avoid a technical recession this year, while the BoE is expected to roll out a 25bps rate hike this week, widely anticipated to be its last hike for the year.

4. The commodity currencies all rallied against the dollar last week, on sentiments that markets would recover after the $30 billion rescue package by big banks for First Republic Bank. The kiwi rose to $0.62 against the dollar, despite poorer-than-expected GDP figures, as GDP shrunk by 0.6% this quarter below market expectations of a 0.2% drop. Similarly, the aussie rallied near $0.67 to the dollar, after robust employment data last week. Employment grew by 64.4k, above market expectations of 49.7k, while unemployment fell from 3.7% to 3.5%, also below an expected 3.6%. Unemployment claims fell from 212k to 192k, less than an anticipated 205k. Elsewhere, USD/CAD ended the week at $1.37 from $1.38, underperforming compared to its commodity currency peers after the Bank of Canada indicated that it had completed its tightening cycle last week. Markets expect a divergence in rates for the loonie compared to the dollar, leading to persistent weakness in the loonie. Inflation and retail data are due this week, which would show whether there is room for further rate hikes.

5. Gold rallied to $1988 per ounce, a high not seen since April 2022, as investors rushed for the safe haven asset due to the uncertainty around the UBS takeover of Credit Suisse. With the news that 6 major central banks, including the Fed, rolled out liquidity measures to aid US dollar swaps on Sunday afternoon, gold remains an attractive alternative to the dollar in the short-term. Brent crude slumped to $72 per barrel last week, last reached in December 2021, after fears that the banking crisis could trigger a recession led to expectations of a decline in demand for oil. Prices had been ranging for a while, as traders weighed the impact of slowing Western demand with increasing demand from China. OPEC+ is likely to wait till after the Fed’s rate decision this week to decide if output should be adjusted.