Financial market conditions have settled a little. US regional banks reclaimed some of Monday's heavy losses, US bond yields reversed some of their enormous drop. However, it seems far too early to sound the 'all-clear' on this topic. The genuine fear is that depositors in these less scrutinised and less regulated banks will choose to migrate deposits to more highly scrutinised, highly regulated, and better-capitalised banks. Overnight Bloomberg reports that $15bn of deposits have flowed to Bank of America, one of the Financial Stability Board's 30 Global Systemically Important Banks (G-SIBs).
This brings us to the Fed and the dollar. The release of the February CPI yesterday showed that inflationary pressures are still evident but are expected to fall. The Fed must be praying that market pricing of the 22 March FOMC meeting moves back to a +25bp hike (+20bp now priced) such that it can deliver a no-fuss hike. For the dollar - more settled financial conditions should allow it to reconnect with softer rate differentials and leave the dollar slightly offered. Expect a further day of consolidation in the dollar, although softer US retail sales figures could give it a gentle downside bias.
The US dollar found support near USD/CAD 1.3660 and is trading with a firmer bias today. The initial corrective target is around 1.3730 and then CAD1.3760. Domestic data trends remain positive—yesterday’s Jan Manufacturing Sales rose a slightly stronger than forecast and supports the impression that the Canadian economy is faring relatively well in the early part of the year. External factors will be the main drivers for the currency in the immediate term.
After the wild swings in short-dated bond yields this week, the two-year EUR:USD swap differential seems to be settling around the -100bp area - some 40bp narrower than last week. Should equities settle down a little, EUR/USD could start to reconnect a little with yield differentials and head up to the 1.08 area. Any severe signs of US money market stress could easily see these EUR/USD gains reverse. The mood in EUR/USD may also be subdued ahead of the European Central Bank's expected 50bp hike tomorrow.
Today UK Chancellor Jeremy Hunt will present what has been billed as a 'budget for growth'. At the heart of the budget seems measures to improve the cost of living crisis (caps on energy bills), measures to address the decline in the UK labour force (childcare support and pension reform) plus perhaps some incentives on investment. While the UK's near-term growth forecasts may be revised higher most expect the medium-term growth prospects will be revised lower. We doubt anything in the Budget will be GBP negative but equally we do not see it as especially GBP positive either. With the Bank of England nearer to a pause than most GBP/USD may struggle to break 1.22.