News & Analysis


Despite fears of bank stability retreating in markets yesterday, the issue remained front of mind for BoE watchers as Governor Andrew Bailey discussed the topic in a speech to students at the London School of Economics. Bailey took the time to comment on recent developments, highlighting the distinct tools that the BoE uses separately to combat inflation and financial instabilities. However, the focus of the speech remained on monetary policy, where the Governor hewed close to the messaging seen accompanying the recent interest rate decision, where Bank Rate was raised to 4.25%. In particular, Bailey stressed the Bank’s data dependence suggesting that rates may need to rise further if “any signs of persistent inflationary pressures” are seen. In our view, this continues to imply a Bank that would be content to call a halt to its hiking cycle at the next meeting in May, provided the economy continues to evolve broadly in line with expectations. Bailey will get a further opportunity to add to these comments in testimony this morning to the Treasury Select Committee at 09:45 BST, alongside fellow MPC member Dave Ramsden. Given that the collapse of SVB is the topic in focus, it is unlikely that markets will hear anything too unexpected, but the opportunity to gauge the views of the lesser heard from Ramsden will potentially hold the attention of some. Elsewhere in the UK, for now at least, yesterday saw the election of Humza Yousaf as leader of the SNP, narrowly beating fellow leadership candidate Kate Forbes by 52-48%. If that margin of victory is causing flashbacks, especially in the context of a movement to break up a political union, it is worth noting that the vote had little impact on the pound on this occasion. Accordingly, sterling nudged up marginally against the euro over the course of yesterday’s session, and climbed 0.4% against the dollar as financial stability concerns retreated. With this trend continuing this morning and another day of light data releases in the calendar, it seems that any price action in the pound is most likely to be in response to events elsewhere.


EURUSD climbed 0.37% over the course of yesterday’s session in what was a fairly uneventful session. The only notable development stemmed from an ECB “sources” story, which stated that the ECB Executive Board member Isabel Schnabel favoured including language that signalled the possibility of hiking interest rates further in the ECB’s last rate statement. Ultimately, this wasn’t included as the Governing Council instead opted to retain language around data dependency, but the headlines did reinforce Schnabel’s position as one of the more prominent hawks within the ECB’s decision-making council. This helped to firm up expectations of further ECB hikes, a dynamic that we think should help EURUSD continue to rally in the near-term as long as the broader risk environment remains stable. Currently, markets are fully pricing in 50bps worth of hikes over the course of the next four ECB meetings up until September. Today, focus will remain on ECB commentary as President Lagarde is set to speak at a BIS event at 14:15 BST alongside Bundesbank Chief Joachim Nagel.


No news over the weekend was good news for both bank stocks and the broader risk environment yesterday. European banks rallied close to 1% as measured by the Stoxx 600 aggregate, while gains in US regional bank stocks were more moderate at 0.77%. Not only did the more subdued backdrop in financials bring down the level of volatility in the cross-asset space, but it also weighed on the dollar and led to front-end yields reflating. The dollar DXY index traded 0.22% lower, while the 2-year Treasury yield spiked 23bps higher as traders started to favour the odds of a final rate hike from the Fed in May as per their latest dot plot. Early price action this morning suggests a continuation of this theme with the DXY index trading 0.2% lower and front-end Treasury yields trading slightly higher following a constructive overnight session in Asian equities, however, the extent to which this theme can endure the whole session largely depends on what is said in the Senate hearing at 15:00 BST. Testifying in front of the Committee on Banking, Housing, and Urban Affairs on the topic of “Recent Bank Failures and the Federal Regulatory Response” is the Fed Vice Chair of Supervision Michael Barr, FDIC Chairman Martin Gruenberg, and Undersecretary For Domestic Finance Nellie Liang. With officials still holding an information advantage on the state of the banking sector as the Fed’s data on liquidity provision and deposit flight isn’t released until the end of the week and with a one-week lag in the case of the deposit data, markets will be paying close attention to the commentary from officials to gauge the level of perceived risk of broader contagion. As is customary, the Fed has already released its opening statement, with Barr stating that banks are “sound and resilient”. While this has likely contributed to the more supported risk backdrop overnight, the comments don’t come as a surprise. The unscheduled comments in response to questions by Senators will be the focus for markets today.


Yesterday, the Canadian dollar was the best-performing G10 currency against the US dollar, rallying by 0.6% as investors covered their risk-off shorts. Since the collapse of SVB, markets have been toggling between risk-on and risk-off mode primarily based on whatever is going on in bank stocks. News over the weekend reported that SVB’s assets found a buyer in First Citizens Bank, a regional bank based out of the other end of the country, headquartered in North Carolina. This was enough to put equities in the green, albeit not by much, and boosted most cyclical G10 currencies. Three key factors explain the loonie’s relative outperformance. For one, volatility is dropping sharply, which tends to benefit CAD. Two, while Canadian yields didn’t climb quite as high as US yields on Monday, they significantly outpaced the increases in yields in other regions. And three, crude oil prices posted a sizable gain, rallying over 5% to $72.81. Commodity analysts suggest that short covering and tight supply could lead the oil rally to continue, which would be supportive for CAD. This is eminently plausible: CFTC data shows that oil short positioning has reached an extreme, and Iraqi and Kurdish officials haven’t resumed shipping barrels out of a Turkish port due to a legal dispute. Today, there will be no Canadian data releases worth watching. Instead, analysts will be sure to pore over the 2023 edition of the Federal budget.



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