News & Analysis


Following all the excitement of last week, encompassing the spectre of yet another banking blow-up and a raft of central bank rate decisions, including from the Bank of England which hiked interest rates by 25bps, something that might have gone under the radar was the release of PMI data on Friday morning. The UK release continued the trend seen in February, with an expansion seen in the services sector and contraction in manufacturing. Given the dominance of services in the UK economy this netted out to a modest expansion in economic activity overall, albeit one that slightly underperformed expectations. In doing so the release added support for the updated guidance from the Bank of England, which suggested on Thursday that the UK economy is performing better than expected at the time of the February meeting when they published the most recent set of economic projections. However despite the outperformance in economic growth, the MPC also noted that underlying inflation was evolving broadly in line with expectations, choosing to hike for what we think is a final time with Bank Rate now at 4.25%. Whilst the pound was able to take some support from this rate decision, rumours about the stability of Deutsche Bank put sterling on the bank foot into the end of the week, with the GBPUSD falling 0.5% on Friday. Given that banking concerns have retreated somewhat over the weekend and a light data calendar for the upcoming week, with speeches by BoE Governor Bailey today at 18:00 and tomorrow at 09:45 being the notable highlights, these moves may well reverse over the coming days. But with rates now significantly higher than they have been for a long time, further concerns around financial instability as a driver of FX markets appear as if they are here to stay.


The single currency fell two thirds of a percent on Friday as European banking stocks once again felt the impact of fragile investor confidence. While the same names that led losses on Friday have opened this morning higher, EURUSD remains little moved this morning ahead of a string of ECB speakers that are set to hit the wires and the Ifo confidence reading from Germany at 09:00 BST. Out of the crowded ECB roster, Bundesbank president Nagel at 09:30 BST and Governing Council member Isabel Schnabel at 16:00 BST stand out from the crowd. While their commentary will be closely monitored, especially as monetary policy divergence is set to be a primary driver of continued EURUSD upside, ultimately we expect their comments to not deviate too much from the central bank’s core message that interest rates need to tighten further to bring down inflation.


Sell on Friday and go away? Price action at the end of last week saw financial stability concerns dominate yet again as Deutsche Bank’s shares started to plummet following a spike in the price of the bank’s CDS — the cost of insuring against default. Unlike its predecessors, Deutsche Bank didn’t scan as particularly vulnerable in terms of profitability, deposit exposure, or capital ratios. Instead, it seems as if after multiple weekends of negative headlines on European and US banks, investors no longer wanted to hold bank stocks over the two-day break in markets. With Deutsche arguably the next in line after Credit Suisse in terms of brand image, they took the brunt of the investor distrust. Although the slump in European banking stocks stabilised throughout the day, with the Stoxx 600 bank index closing just 3% lower on the day after falling as much as 5% in the session, the damage to overall risk sentiment was already done and the dollar was back in demand.

At the start of this week, following a fairly quiet weekend in terms of negative news on the banking industry, European bank stocks have largely opened in the green with the Stoxx 600 banking index 2.5% higher. Leading gains within the sector is Deutsche Bank, which is trading up over 4% this morning. With the data calendar looking a lot sparser this week, barring a few Fed and ECB speakers and some inflation reports on Friday, the emphasis will once again rest on the banking sector and more specifically what it is exposed to. A lot has been made of corporate real estate, to the point that taxi drivers may soon be discussing it. That may be the next shoe to drop for markets and is being heavily monitored for that reason.


The Canadian dollar was yet again one of the better G10 performers against renewed dollar strength on Friday. The fact that the decline in bank stocks, including flagship names such as JP Morgan and Citi bank, didn’t impact the performance of overall equity indices likely aided the loonie’s relative resilience. This morning, with the risk backdrop much more stable after a constructive open for European equities, the loonie is trading 0.1% higher. The minor move is in line with the rest of the G10 currency board at the start of what should be a much quieter week for markets.



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