Despite much discussion of the unique problems facing the US regional banking system after SVB's failure, pressure in the banking sector did cross the Atlantic yesterday and asked questions of the European banking system. All eyes are on the health of Credit Suisse (CS) - one of the world's 30 Global Systemically Important Banks (G-SIBs). Pressure on a G-SIB has understandably unnerved global financial markets, which are clearly trading at stressed levels. Expecting another nervous day in FX markets, we suspect investors will want to hang onto defensive trades and probably long dollar balances in case financial conditions deteriorate further. Expect USD to remain highly volatile with upside that could come into focus (for the wrong reasons) if stress in the dollar wholesale funding market were to spike again.
The US dollar is unwinding the gains that lifted it through 1.38 in the middle of the week. The greenback slipped briefly through 1.3680 today before steadying. Compelling reasons to push the CAD higher are slim and that likely means more, choppy range trading between 1.35-1.38 for now. Observe the USD/CAD trends.
The absence of forward guidance in yesterday's policy announcement hasn't convinced the ECB's policy hawks (Kazimir, Simkus, and Muller) that the tightening cycle is ended. With a definite tightening in financial conditions, swaps are pricing in a 25bps increase at the May meeting and a bit further tightening after that. However, terminal rate bets have been scaled back slightly. Gains in the EUR are currently constrained by a widening of the short-term EZ-US cash bond spreads (-160 bps from -132 bps earlier this week).
Chancellor Jeremy Hunt's budget delivered yesterday was generally seen to strike the right notes - albeit within the restraints he was given. It has been hard to pick out any GBP reaction to the budget given all the stress in financial markets. Overall market sentiment will probably drive performance of the GBP/USD over the near term. Expect GBP/USD to bounce around in a 1.20-1.22 range until this banking sector crisis calms down.
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