ears spread to Credit Suisse, a bank that had posted heavy losses in recent months, though for completely unrelated reasons to the problems that brought down SVB. Given the violence of the moves in rates, FX had an almost subdued week, though the moves were not easy to explain. One safe haven (the Japanese Yen outperformed all other currencies, but others (Swiss franc and US dollar) actually fell in the week. Perhaps unsurprisingly, as these were the two epicenters of the banking troubles so far. Latin AMerican currencies fell, as one woudl expect in a bout of risk aversion, but Asian ones rose, as their economies seem untouched by the crisis and the Chinese reopening story remains front and center.

Volatility is likely to continue this week as traders digest bank-related headlines and at the same time the Fed meets. It is extremely difficult to predict what the latter will do, as it has to balance unremitting inflationary pressures on the one hand with the potential tightening of financial conditions brought about by the banking problems in the US. As this is written, the other large Swiss bank, UBS, has agreed to buy Credit Suisse as part of a deal that includes extensive government guarantees. We think that this decisiveness, together with the implicit guarantee of all bank deposits in the US, should be enough to contain the crisis and expect the Fed to hike by 25 bp this week, but the situation remains very fluid.

GBP

Sterling continues to hold up well amid the crisis, as the UK banking system seems to be on a solid footing, and expectations of a 2023 recession continue to fade. The UK Budget announcement was marginally more optimistic than expected, but traders’ thoughts were elsewhere. In addition to any headlines from the banking troubles, this is a really packed week for the Pound. On Wednesday we get the inflation data. Markets are expecting the core index to remain essentially unchanged just below 5%. The next day the Bank of England meets, and traders are evenly split between pricing in a 25 bp and no change. We continue to bet on the former. We think the MPC will follow the ECB’s lead in separating the fight against inflation from maintaining financial stability, a different problem for which different tools are available.

EUR

The ECB chose to look past the banking issues and hike rates by 50bp, though it removed forward guidance and made it clear that further moves will be data dependent. We think this si an entirely reasonable decision. Unless we see a significant deterioration in financial stability, which we do not expect after the decisive steps taken by US and Swiss authorities, we think the inflation outlook and economic activity will continue to justify further hikes and provide support for the common currency. This week´s key report out of the Eurozone is the release of the PMI indices of business activity on Friday, which are expected to remain consistent with moderate economic expansion and a very low likelihood of a recession.

USD

Economic and inflation data continue to support further hikes from the Federal Reserve. Inflation came out stronger than expected and there were signs of a reacceleration in the key core inflation subindex. The labor market remains historically tight, and jobless claims are now back down to all time lows. However, the regional banking crisis in the US wmay have some tightening effect in terms of reducing credit creation. Credit spreads have widened but on average not dramatically, so we think this effect should be modest, but it does warrant some additional caution from the Fed. We still expect it to hike 25 bp and follow the ECB´s lead in becoming data dependent in later meetings, but think the expectations priced in by markets of nearly 100bp of cuts later in 2023 are very overdone.