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Lingering bank concerns drive down yields and US dollar

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27 March 2023

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

Typical market correlations broke down last week. The forced merger of Credit Suisse with UBS allayed European banking concerns temporarily.

‘dovish hike’ from the Federal Reserve, and fears of a reduction in bank credit in the US, drove Treasury yields sharply lower. Risk assets were torn between banking concerns on the one hand and the positive impact of lower interest rates on the other, and ended the week nearly unchanged, while emerging market currencies mostly rose. The Norwegian krone was the standout for the week, driven higher by a hawkish central bank. Volatility is on the rise everywhere, particularly in fixed income markets.

Activity this week will be dominated by inflation reports and (possibly) banking headlines. The Eurozone flash inflation report for March, out on Friday, will be the focus of the week. Markets are expecting yet another record high in the key core measure. The US PCE inflation report later the same day is for February, so it is unlikely to have the same impact. Aside from that, it will be mostly second-tier data from the main economic areas.


The Bank of England provided yet another head fake last week. A really nasty inflation surprise earlier in the week forced its hand and it delivered another 25bp hike. The rhetoric also turned hawkish, with emphasis on the recent positive growth surprises, while the guidance on rates in the statement was kept unchanged, despite the ongoing banking uncertainties.

It could hardly have been otherwise: core inflation spiked and came in at an unprecedented 0.5% above
consensus, at 6.2%, reversing completely the modest progress of the past few months. Putting together the generally positive note of macroeconomic releases, the spike in inflation and the Bank of England’s apparent hawkish turn, we think that the path of least resistance for sterling will be up.


The contrast between the ECB’s hawkish rhetoric and the Fed’s dovish hike buoyed the common currency in the first half of the week, while the blowout PMI business sentiment numbers for March supported it on Friday. However, dubious rumours about Deutsche Bank and general nervousness forced it to give up its gains on Friday, which illustrates the volatility and nervousness in markets. The rumours were, however, denied by German PM Scholtz and that was enough for the euro to end the week modestly up against the dollar.

Core inflation, due out on Friday, is expected to creep up to yet another all time high, and European banks appear to be in better shape than their US counterparts; so we expect no let up in the ECB’s hiking campaign, which should be positive for the euro.


After wild gyrations over the past two weeks, markets settled on a 25bp rate hike prediction going into the Federal Reserve meeting last week, and that’s exactly what Powell delivered. However, the statement accompanying the decision, as well as the press conference, made clear that the Fed expects some degree of financial tightening as a result of the banking turmoil. This means the central bank will err on the side of caution until the extent of that tightening becomes clear over the next couple of months.

In light of the Fed’s dovish rhetoric, and the sharp drop in US yields since the collapse of SVB, the gap in rates across the Atlantic, and between the US and most other G10 countries, is now closing fast. This should have bearish consequences for the US dollar, which has underperformed most currencies globally since the start of the banking turmoil.


As one would probably expect, the safe-haven yen has been by far and away the best performing currency since the start of the recent banking turmoil, extending its rally to more than 5% on the dollar in a little under three weeks. The yen has benefitted on a number of fronts. Firstly, the downward repricing in global rate expectations has narrowed the rate differentials between Japan and almost everywhere else, given the lack of room for BoJ cuts. Banking troubles in both the US and Switzerland have also held back the yen’s fellow safe-havens, the Swiss franc and US dollar, while JPY was trading at rather weak levels prior to the uncertainty, so has had plenty of scope for a rebound. BoJ governor Kuroda will be making one of his last public appearances tomorrow, although we think that Friday’s March inflation data will be a bigger market mover.


The yuan ended last week little changed against the US dollar and in trade-weighted terms, but lagged behind most of its EM and Asian peers. Xi Jinping’s visit to Russia provided little groundbreaking headlines, but it appears that the country’s growing dependence on China could support the yuan’s internationalisation push.Putin explicitly stated that the country is ‘in favour of using’ the yuan when trading with countries in Asia, Africa, and Latin America.

Last week brought little economic news from China. Today’s industrial profit data, which showed a 22.9% YoY slump in the first two months of the year, adds to the argument that the recovery is not yet broad-based and demand appears to be rather fragile at this stage. Given that hard data shows a mixed picture of the recovery, the unexpected RRR cut earlier this month seems justified. Although lenders left the one- and five-year loan prime rates unchanged last week, some policy easing further down the road cannot be entirely ruled out. This week, attention will be on the NBS PMI data for March (Friday).

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