Bank Stress Hobbles the Dollar, while Dissents Make the 50 bp Hike by Sweden less than Hawkish

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Marc Chandler
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Overview: The re-emergence of bank stress reverberated through the US markets yesterday, downgrading the perceived chances of a Fed hike next week and sending the US 2-year yield sharply lower. The yield settled 13 bp lower, the largest drop in three weeks. The risk-off sent the US dollar higher against most of the major and emerging market currencies. Follow-through US dollar gains today has been mostly limited to the Australian dollar, where after today's CPI figures has given up any residual chance of a hike next week, and the Swedish krona, where two dissents give a dovish twist to the Riksbank's 50 bp hike. The euro and sterling are leading the G10 currencies today. The euro's strength is helping to lift the eastern and central European currencies higher to lead the emerging market complex.

The US 2-year rate has stabilized today near 3.92%, and the perceived odds of a Fed hike next week is slightly above 80%. Equities were mixed in the Asia Pacific region, but of note China's CSI 300 fell for the sixth consecutive session. Europe's Stoxx 60 is off around 0.7%, for its third consecutive decline. Its bank share index is off 1.1% after falling 2.7% yesterday. Favorable earnings by a regional US bank and Microsoft and Alphabet are encouraging bottom picking after yesterday's sharp US equity losses. The 10-year US Treasury yield is little changed near 3.41%, while European benchmark yields are mostly 2-4 bp lower. Sweden's 10-year yield is off six basis points. Gold has recovered from yesterday's low near $1976 to again straddle the $2000 area. June WTI made a marginal new low for the month yesterday ($76.50) amid demand concerns, reports suggesting there was no sign of Russian output cuts and worries that refiners' demand will slow. Late yesterday's API reportedly estimated that US inventory fell by 6 mln barrels. June WTI is trading with a $77-handle today.

Asia Pacific

Japanese life insurers are announcing their investment strategies for new fiscal year that began this month. There seems to a few common themes. First, last year, there was a broad move to cut hedged and unhedged foreign bonds and the proceeds were mostly shifted to the domestic bond market. Second, there still seems to be some work to do. One company said it was exiting the remaining fx-hedged debt holdings. Third, many of the companies expected the Bank of Japan's Yield Curve Control policy to be adjusted in the first half of the fiscal year and that the cap could be raised to 0.75% or 1.00%. Lastly, many seem to be modestly dollar bearish, but in line with the median view in Bloomberg's survey that has the dollar the current fiscal year (March 31, 2024) at JPY123.00.

China's CSI 300 reached a two-month high last week near 4170. It fell for the sixth consecutive session today, the longest spill since last October. The more than 6% decline over the run will likely draw some official attention, it would not be surprising to hear talk of some state-owned enterprises buying. Through yesterday, the NASDAQ Golden Dragon China Index of Chinese companies that trade in the US fell for the sixth consecutive session. It fell by more than 2% Monday and Tuesday after dropping more than 1.5% a day in the final three sessions last week. It gapped lower yesterday to new lows since the end of last November. With yesterday's losses, it has given back nearly half of the gains from last year's low set in October. The index of mainland shares that trade in Hong Kong is off about 5.3% this month, giving back most of last month's gain after dramatic volatility early in the year (+10.7% in January on re-opening hopes and fell almost 11.4% in February). 

Australia's Q1 inflation rose 1.4% quarter-over-quarter, slightly more than expected, but less than the 1.9% rise in Q4 22. The year-over-year rate eased to 7.0% from 7.8%. The median forecast was for a 6.9% pace. The underlying trimmed mean and weighted median measures both rose by 1.2%, which was a little less than forecast. The futures market has given up any chance of a hike next week. The Reserve Bank of Australia announced a pause earlier this month, with the cash target rate at 3.60%. The market thinks that its monetary tightening cycle is over, and the year-end rate is now seen near 3.48%. It had been almost at 3.70% for the last several days.

The dollar is in a half-yen range below JPY133.90. It is holding slightly above yesterday's low (~JPY133.35) and the 20-day moving average (~JPY133.25). A break of below there could signal test on the JPY132.00-20 area. The US 10-year yield rose above 3.60% last week and is now hovering around 3.40%. The Australian dollar is extending its sell-off to test the $0.6600 area. Recall that last week it briefly traded above $0.6770. The lows for the year were set on March 10 near $0.6565. A push below it opens the door to $0.6400. The greenback reached CNY6.9335 yesterday, the highest level since March 10 and slightly above the 200-day moving average. It steadied today in narrow CNY6.9165-CNY6.9290 range. Yesterday's nearly 0.55% gain was the biggest for the US dollar this month. Today's softer tone is snapping a three-day advance. The dollar's reference rate was set near expectations (CNY6.9237 vs. CNY6.9226).

Europe

As widely expected, Sweden's Riksbank lifted its repo rate 50 bp to 3.50%. The swaps market sees a terminal rate near 4.0%. Indeed, another 50 bp hike at the June 29 meeting cannot be ruled out yet. That said, in February, the Riksbank forecast that the policy rate would peak at 3.33%, which required lifting the policy path today. Underlying inflation remains high at 8% (peaked at the end of last year at 10.2%) and the base effect suggest further slowing in Q2 and Q3. Central bank officials also are aware of that the roughly 11.5% depreciation of the krona since the end of 2021 may also feed into higher domestic prices. Nevertheless, two members (First Deputy Governor and Deputy Governor) dissented in favor a quarter-point move and did not want to signal another hike in June or September, which the majority did. The combination of the dissents and the signal that the central bank is nearly done, gave the 50 bp decision a dovish tint and the krona as weakened against the dollar (~0.25%) and euro (0.95%).

Norway's central bank meets next week (May 4, same day as the ECB). Its underlying measure of CPI peaked in January at 6.4% and the policy rate is at 3.0%. a 50 bp hike. It began its tightening cycle in September 2021 and hiked by a quarter-point three times through March 2022, and then delivered three consecutive 50 bp moves. Starting last November and running through March 2023, it reverted to quarter-point steps. Another 25 bp hike is most likely and a follow-up hike at the June 22 meeting also seems likely. Note that the Norwegian krone is the weakest of the G10 currencies this year, off about 7.7%. The Swedish krona is up about 0.90% year-to-date, after today's fall.

The Swiss franc is the best performing G10 currency so far in 2023. It has appreciated by almost 4.0%. The euro and sterling are jostling for second place with around a 3.2% gain. Last year, the franc also did best among the major currencies, falling almost 1.2% against the dollar. The euro was in second place too, with a nearly 5.5% decline. Domestic sight deposits trended lower starting last April and bottomed at the start of the year. It seems clear that Credit Suisse was experiencing an exit of deposits before the banking stress erupted last month. Since the end of February, domestic sight deposits have risen by almost 3% through the end of last week (~CHF14.3 bln). International banks saw an increase in sight deposits about CHF3.4 bln. Switzerland's EU harmonized measure of CPI rose 2.7% year-over-year in March. The deposit rate is at 1.50%. The swaps market has a 25 bp hike practically fully discounted for the June 22 meeting, and another hike in September.

The euro traded heavily yesterday, but second thoughts about a Fed hike next week, has seen it practically fully recover. It settled yesterday slightly below $1.0975 and has traded to almost $1.1055 today. Yesterday's high was a little above $1.1065 and Monday's high was $1.1050. A one-year high was set on April 14 near $1.1075. The intrasession momentum indicators are stretched and the upper Bollinger Band is by $1.1065. Sterling's recovery today is just as impressive. Yesterday's sterling posted an outside down day by trading on both sides of Monday's range and closing below Monday's low. Despite this bearish price action, there was no follow-through selling, and sterling held above $1.2400 today to approach $1.2485. The five- and 20-day moving averages, which had looked poised to cross to the downside, have not. The intraday momentum indicators ae overbought. A pullback in early North American trading could test initial support near $1.2440-50.

America 

The 3.4% drop in the KBW Bank Index yesterday, the most since March 22 and fourth consecutive decline and to levels not seen since very early this month sent ripples through the US rates market. The Fed funds futures waivered about a hike next week. and had downgraded the probability for 90% to around 75%. After PacWest better than expected earnings, the odds have recovered to about 84%.

When the financial stress hit, and liquidity concerns became acute, the ECB did not offer euro swap lines with central and eastern Europe. The Bank of Japan did not provide more liquidity. Nor did the People's Bank of China. Despite the talk of de-dollarization, when the push came shove, the Federal Reserve offered a daily dollar swap facility instead of the weekly operations. The daily frequency seems to us from the start to be more preventative than preemptive and also a signaling element to reassure. In point of fact, the daily operations were hardly used. So, reverting to weekly operations next month will have little direct impact, but may also be a reassuring signal that the stress has ebbed.

The most important high-frequency data points over the next two weeks are the first estimate of Q1 GDP due Thursday and the April jobs report on May 5. Today's data, March goods balance, inventories, and durable goods orders will help fine turn Q1 GDP expectations. The Atlanta Fed's GDP tracker will be updated (from 2.5% on April 18). The median forecast in Bloomberg's survey is for 2.0% annualized growth. Surveys have found a weakening of capital investment plans. However, today's durable goods orders will likely be inflated by a jump in Boeing's orders (60 aircraft orders in March after five in February). Excluding transportation orders, durable goods orders are likely to have fallen for the second consecutive month and the third time in four months. A 0.1% in core shipments (excluding transportation and defense orders) would offset the 0.1% decline in February.

The risk-off mood saw the US dollar surge to almost CAD1.3650 yesterday. It is the (61.8%) retracement of the dollar's decline from the year's high set on March 10 (~CAD1.3860) to the April 14 low (CAD1.3300). The greenback is in a narrow range today (~CAD1.3615-CAD1.3645). A move below CAD1.3600 would weaken the US dollar's technical tone but a break of CAD1.3550-70 is needed to spur ideas a top is in place. The combination of the risk-off and comments from Banxico Governor Rodriguez that central bank will discuss pausing at the next meeting (May 18) helped lift the dollar to MXN18.1440 yesterday, its best level in a week. Last week's high, tested twice, was closer to MXN18.1540. There has been no follow-through dollar gains, and the greenback is consolidating between about MXN18.0520 and MXN18.1275. The intraday momentum indicators favor the dollar's upside in early North America provided support near MXN18.05 holds.