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EUR
After trading on a strong note overnight following the Fed meeting on Wednesday, the single currency struggled to consolidate gains throughout the European session yesterday, especially as risk sentiment started to turn. Ultimately, with the fragility of the global banking system and especially US regional bank stocks back in scope, EURUSD closed 0.22% lower on the day. This saw it snap a five-day rally. This morning, with Asian financials leading losses and European banks opening substantially lower, the euro has continued to depreciate. This dynamic may be maintained today, especially with the currency pair trading close to the top of its recent range. While traders will be keeping one eye on the performance of financial stocks today, the other will likely be on March’s flash PMIs. Kicking off proceedings are the French numbers at 08:15 GMT, which may be slightly impacted by the uptick in industrial action over the past month, although expectations look for a consolidation of the February figures. Shortly after at 08:30, the German data is expected to show a slight improvement in overall activity, but expectations still see a slowdown persisting in the manufacturing sector. Then at 09:00, the eurozone measure is released with the composite reading expected to hold firm at 52.0 from February. Given the PMIs produce timely information on the state of the eurozone macroeconomy, the data reports will still be closely monitored by both markets and analysts. However, in terms of euro price action, it is likely that they will have little impact as the primary concern remains financial stability, especially if they meet consensus.
While the inability of EURUSD to consolidate its overnight gains yesterday was closely monitored by market participants, what really drew attention yesterday was the latest interest rate decisions out of Switzerland and Norway. While both central banks continued to point towards ongoing tightening, the Swiss National Bank seemed to be more restrained in doing so by concerns over domestic financial stability. Hiking 50bps to 1.5%, the SNB signalled both explicitly and implicitly with its forecasts that further tightening is required, but markets viewed this as just one final 25bps hike in Q2. Potentially acknowledging the ceiling that is currently imposed on their policy rate, the SNB upped the ante in terms of the language around FX intervention, noting the one-directionality of their recent activity despite previously stressing a symmetric tolerance to the value of the franc. In our view, the SNB would want a substantially stronger trade-weighted CHF, especially if core inflation continues to tick higher in March. However, their ability to achieve one in this environment of capital outflows isn’t yet clear. What is notable is that markets didn’t necessarily heed the warning of sustained SNB action to strengthen the franc, with CHF gains fairly limited in yesterday’s session. Meanwhile, in Norway, the Norges bank met expectations by hiking 25bps to 3%. The real surprise came in their rate projections, which at 3.6% now signal two further hikes in May and June, and Governor Bache’s comments on the weakness of the krone. While the Norges Bank is likely to continue prioritising monetary policy through the interest rate channel, it is likely, especially with the suppressed price of oil at the moment, that it begins consultations with the Ministry of Finance to dial down or temporarily halt the sterilisation of oil revenues as to limit the depreciation pressures on NOK. For now, the sizable rally in NOK against both the euro and the dollar in response to the latest Norges Bank decision will be welcome for new Governor Bache, however.
USD
The dollar took a bit of a back seat in yesterday’s European session as the initial wave of depreciation post-Fed flushed through overnight. With European equity markets opening, focus soon turned to other central bank decisions, this time out of Switzerland, Norway and then finally the UK. It wasn’t until the European close that markets turned their attention back stateside, as the Federal Reserve updated its balance sheet data and Treasury Secretary Janet Yellen was seen walking back comments on Wednesday that Treasury officials neither considered nor examined the possibility of expanding the FDIC’s coverage without Congressional approval. With Yellen trying to rectify the damage done by her comments to the Senate on Wednesday and the balance sheet data showing still elevated usage of the Fed’s liquidity provisions, whether it was via rotation from discount window usage to the new BTFP for domestic banks or via the Fed’s standing repo facility FIMA from oversees monetary authorities, market jitters over the robustness of the US banking system started to reappear. As we noted in yesterday’s report, these lingering concerns are likely to act as a handbrake on the risk rally, and this was partially seen yesterday as the dollar stemmed the bulk of its losses as the session wore on and US banking stocks continued to slide. Overnight and heading into the European open this morning, these same worries have persisted with Asian financials leading losses and the Japanese yen sitting at the top of the G10 currency board. The main event for markets today is likely to remain the performance of the global banking system, specifically regional US banks where deposit flight has seemingly continued the need for liquidity assistance. However, some attention will be paid to the flash PMI reports for March, especially after February’s US edition fuelled speculation over a no-landing scenario for the Fed. For the US, this data will be released at 13:45 GMT today, and special focus will be given to analysing signs of financial conditions spilling over into sentiment and real economic output. If this becomes visible, it will likely assist the performance of US banking stocks in keeping Treasury yields capped, which could weigh on the dollar if it isn’t so concerning that it sparks a renewed haven bid for the greenback.
GBP
Following recent rate announcements from both the Fed and ECB, yesterday it was the Bank of England’s turn to take centre stage. As expected, the MPC hiked Bank Rate by 25bps, in line with both markets and our expectations. Whilst there had been some speculation earlier in the week that the Bank could opt to hold rates, with market pricing as recently as Tuesday viewing the meeting as a coin toss, Wednesday’s hot CPI release in all likelihood confirmed the need to hike once again. With no major shock from the rate decision, it was therefore the accompanying commentary that drew much of the attention. Our reading of the meeting minutes was that the Bank is looking to make the current 4.25% Bank Rate the terminal level, as policymakers notably chose to look through the recent upside surprise in CPI, suggesting this was driven largely by transitory factors such as food prices. Instead, the statement pointed to readings that showed core inflationary pressures dropping, in line with Bank forecasts. Whilst the Bank did warn that additional signs of price rises could warrant further action, the evolution of data consistent with projections and in the absence of any true shocks, would suggest a Bank that is done with monetary tightening. This point was emphasised by Governor Bailey again this morning in an interview with BBC Radio 4, where he observed that inflation was expected to drop sharply over the course of the year, but if firms were to hike prices more than necessary, then the BoE would need to raise rates further – although he had not yet seen evidence for this. The first test of this will come this morning, with the release of PMI data. Whilst expected to print in expansionary territory once again, signs of rising wages and price would be a cause for concern at the BoE. Yesterday however, in response to the Bank of England, price action was somewhat mixed as markets attempted to digest the news. Ultimately, GBPEUR ended the day up 0.4% and GBPUSD rose 0.15%, having seen something of a bumpy ride. Longer term, the relative stability of UK monetary policy, combined with the retreat of rate expectations elsewhere on financial stability concerns, are likely to provide support for sterling at current levels.
CAD
Markets kicked off yesterday’s trading session on an optimistic note. North American equities rallied strongly until midway through the session, led by gains in tech giants Apple and Microsoft. At one point, the S&P 500 was up over 1%, while the tech-heavy Nasdaq was up 2% on the day. The strength in equities carried over to high-beta currencies as all G10 currencies were up against the dollar, with CAD being one of the leaders. But, sentiment then started to turn as banking stocks nosedived yet again. This led the S&P 500 to erase most of its rally, closing 0.3% stronger than the day before, while the Nasdaq’s gains were halved. Once again, these moves translated to the FX space, leaving the loonie only 0.1% stronger by the end of the North American trading session after rallying over 0.7% earlier in the day. In other news, US President Joe Biden made his first visit to Canada since taking office, looking to make a show of unity with Prime Minister Trudeau. The leaders are expected to discuss the war in Ukraine, banking concerns, trade, semiconductors, and illegal migration, among other matters of national importance. Today, Canadian retail sales data for January is tabled for release.