Volatility is likely to remain the name of the game. US stock futures point at a marginally positive open this morning, but markets are constantly monitoring incoming news on the health of other financial institutions, in particular US regional banks. It’s worth keeping an eye on the share price of First Republic Bank, after a 62% drop in yesterday’s trading session.
Inflation data will be released in the US today: consensus is for a 0.4% MoM, 5.5% YoY read. Should we see some “orthodox” reaction in rates to a potential data surprise, this could be a signal that some degree of confidence has returned to the market.
In FX, we think the balance of risks is tilted towards another leg lower in the dollar. The Fed and US regulators have taken decisive steps to restore market confidence and may be ready to do more should financial risks fail to abate. While it is true that the move in rates appears overblown, there is ample room for a bounce in risk sentiment, and FX currently is much more sensitive to equities than rates.
Last week, the Canadian dollar was pressed to new lows for the year against the US dollar as the Bank of Canada declared a pause roughly at the same time the Fed and ECB seemed to signal higher for longer. The US dollar set the high for the year before last week around CAD1.3860 and fell to about CAD1.3680 yesterday. Look for the CAD to take cues from broader market themes and further moves in the equity market. Observe the USD/CAD trends.
EUR/USD is holding up at 1.07 despite the huge move in US rates. Euro rates have also followed with a mammoth repricing, and markets are now even doubting the 50bp hike which was “promised” by Christine Lagarde for the March meeting. From an FX perspective, this would be good news for the euro, but: a) a repricing higher in rate expectations would still require President Lagarde to convince markets at the press conference; b) rate differentials remain a secondary driver of EUR/USD, and the direction for the pair is set to be determined almost solely by how the Fed to the SVB fallout. For now, most target 1.08-1.09 by the end of this week.
Market focus in the UK has been centered around HSBC’s purchase of SVB UK, an operation which was championed by the UK government. It is hard to draw any obvious conclusions from an FX perspective, especially in the current market environment where we could see large daily swings in equities. On the data front, data released this morning showed clear signs that wage growth might have finally peaked. This will be welcome news for the BoE and does question whether the Bank will indeed hike by 25bp next week amid the SVB fallout. Even if the BoE decides to hold, this should not prevent GBP/USD to test the January 1.2450 highs if the Fed pivots to the dovish side and risk sentiment bounces back.
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