Trading financial risks for recession

After just one quiet week, market volatility re-emerged. This time, the macro consideration isn’t financial instability, but instead recession risk in the US after numerous survey measures exposed weaknesses in the growth outlook. With some of the data points pre-dating the collapse of SVB and the subsequent tightening of credit conditions, the signs aren’t great for those pinning their hopes on a soft landing for the US economy. Over the course of the week, pricing of a recession has soared, while markets are now betting the likeliest course of action from the Fed is rate cuts. initially this corresponded with a broad sell-off in the dollar and a slight bid in equities, but as the concerns mounted further, the dollar began to feel the positive effects of a haven bid. Now the emphasis rests on whether these same signs are visible within the hard data, starting with tomorrow’s nonfarm payrolls.

Next week’s main event will come in the form of the US inflation readings for March on Wednesday. With markets increasingly positioning for a US recession, a weak reading will increase the pressure for the Federal reserve to call a halt to their hiking cycle and potentially even pivot to rate cuts. At a central bank under slightly less pressure, the Bank of Canada rate decision is due just 90 minutes later, where rates are expected to remain at 4.50%. Elsewhere, a collection of preliminary inflation and wage data is due, but with no other large developed economies on the release list, and a short week following the Easter break, market action and liquidity may well be limited. The lack of alternative distractions means all eyes will be focused on the US drivers of dollar pairs. A surprise in next week’s CPI print could therefore be explosive for markets, providing a catalyst for some currencies to break out of recent trading ranges.

You can read the Week Ahead in full here:

DOWNLOAD THE FULL REPORT

Authors: 

Simon Harvey, Head of FX Analysis

Jay Zhao-Murray, FX Market Analyst

María Marcos, FX Market Analyst

Nick Rees, FX Market Analyst

Disclaimer

This information has been prepared by Monex Europe Limited, an execution-only service provider. The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. No opinion given in the material constitutes a recommendation by Monex Europe Limited or the author that any particular transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, it is not subject to any prohibition on dealing ahead of the dissemination of investment research and as such is considered to be a marketing communication.