Weekly Market Update 27 March – Dollar stems slide to consolidate above 103 as investors seek safety given banking turmoil and fears of a recession
Weekly Market Update 27 March – Dollar stems slide to consolidate above 103 as investors seek safety given banking turmoil and fears of a recession
1. The dollar index ended the week at 103.1, after touching a low of 101.9 not seen since 3 February 2023. The Fed raised rates by 25bps, bringing the Fed funds rate to 5%, while its latest dot plot of projected interest rates gave a median of 5.1%, unchanged from December. Fed Chair Powell mentioned that some officials had contemplated a rate hike pause leading up to the meeting, but the FOMC eventually voted unanimously to raise rates, as inflation remained too high for a pause in rates. While markets had mostly priced in a 25bps hike, they were spooked after Treasury Secretary Yellen’s remarks on Wednesday that regulators had not considered a “blanket insurance or guarantees of deposits”. Yellen, speaking again on Thursday, reassured markets that regulators were prepared to take additional steps to protect deposits if needed, restoring some confidence in banks. However, investors are betting that the Fed will cut rates this year, despite the Fed’s insistence otherwise. The steepest rise in the yield curve since 2008, shows that markets expect rate cuts soon, with the implication that a recession is imminent. Later this week, unemployment claims data and the Fed’s preferred inflation metric, core PCE price index, are due, which would signal the US economy’s health.
2. The euro rose higher to close the week at $1.07 to the dollar, as investors expect it to remain more hawkish than its central bank peers. The ECB began hiking rates later than the Fed, which gives it room to continue even as other central banks are slowing or pausing rate hikes. ECB president Lagarde also reiterated last week that getting rid of high inflation is “non-negotiable”, even as economic data in Europe was mixed. Flash manufacturing PMI came in below estimates for France and Germany at 47.7 and 44.4 respectively, while flash services PMI exceeded expectations with 55.5 and 53.9 respectively. Markets remain wary of further surprises in European banks, with Deutsche Bank’s shares dropping suddenly last Friday. CPI flash estimates are due this Friday, with experts estimating that core inflation will rise.
3. The pound consolidated at $1.22 against the dollar last week, as the BoE raised rates by 25bps and signalled a willingness to persist with further rate hikes depending on inflation data. The economy remained robust, as MPC members dropped initial forecasts of a recession in the second quarter of this year. The labour market remains tight, while inflation came in at 10.4%, above an estimated 9.9%. Given these conditions, the pound is likely to be supported in the short-term. BoE Governor Bailey is also expected to testify in front of the Treasury Select Committee on Tuesday about Silicon Valley Bank’s collapse, which could be an opportunity for markets to further grasp the BoE’s stance.
4. The Loonie ranged to end the week flat, with USD/CAD at $1.37, after y/y inflation fell from 5.9% in January to 5.2% in February. The Bank of Canada had previously stated that if economic conditions play out as expected, there would be no further need for rate hikes after the pause at their previous meeting. GDP numbers are due this Friday, with expectations for the economy to grow by 0.4% m/m. The Aussie fell to $0.66 against the dollar, as RBA Monetary Policy meeting minutes released last week showed that officials thought financial conditions were restrictive, and they were reconsidering a pause at next month’s meeting, so that they would have more time to analyse current economic conditions. These dovish remarks caused short-term selling pressure on the Aussie. Markets are looking to this Wednesday’s y/y CPI data release, which would indicate whether the RBA will continue hiking rates. Elsewhere, the Kiwi slumped to $0.62 against the dollar, despite RBNZ chief economist Conway’s hawkish remarks that the RBNZ is “incredibly determined” to reduce inflation back to its target. Risk sentiments remain weak given the increasing likelihood of a recession, which could dampen demand for commodity-exporting currencies including the Kiwi.
5. Brent crude climbed to $75 per barrel last week, as traders prepared for increased volatility after the banking turmoil over the past few weeks. While US regulators mull over plans to increase dollar liquidity given the fears of a recession, there are also downside risks to the price of oil, including strikes in Europe and robust Russian oil exports. Gold pared losses to trade at $1978 per ounce, as the US’ flash manufacturing and services PMI came in hotter than expected, 49.3 and 53.8 respectively. The economy’s strength outweighed Fed Chair Powell’s dovish remarks, as higher interest rates dampen the attractiveness of non-yielding bullion.
