By Stuart Talman, XE currency strategist
News that the US banking system was witnessing the largest banking collapse since Washington Mutual’s collapse in 2008 rocked financial markets, overshadowing what was expected to the be the week’s headline event – the February US employment.
Silicon Valley Bank (SVB) a Californian based specialist lender with a portfolio of tech and healthcare startups, collapsed as it could no longer fulfill its obligations following a run on deposits.
The bank is the 16th largest in the US with $209 billion in assets.
The implosion was rapid, following an announcement on Wednesday that SVB sold over US$20billion of securities at a close to US$2billion loss in addition to selling US$2.25billion in new shares to shore up its finances.
The largest publicly traded bank focused solely on Silicon Valley and tech start-ups, SVB’s headlines on Wednesday sent warning signs to some of the Valley’s most prominent venture capitalists who instructed their clients to withdraw their SVB deposits.
So, why did SVB collapse?
Horrific risk management.
SVB had a large amount of un-hedged bonds on its balance sheet.
As the Fed aggressively raised rates, the value of these bond plummeted. Unlike other banks, SVB did not utilise interest rate swaps to mitigate interest rate risk.
By Friday, the hopes that the new capital raise or the emergence of a buyer would rescue the bank had been extinguished, SVB placed into receivership by the Federal Deposit Insurance Corp (FDIC).
Having rallied following the release of the jobs numbers, US equities and other risk assets were forcefully sold throughout the New York afternoon, the S&P500 falling from close to a half-a-a-percent gain to end Friday’s session down close to 1.50%. Logging a weekly decline of -4.55%, it was the worst week for the S&P500 since September. The Nasdaq and Dow marked similar sized declines.
The New Zealand dollar looked to be well-placed to climb back through 62 US cents following a mixed US employment report but tipped over a few pips shy of 0.6180 to close the week near 0.6130. Falling close to 1.50% for the week, the Kiwi sat in the bottom half of the G10 leader board, the NOK (-2.29%) , SEK (-2.41%) and AUD (-2.81%) assuming the bottom three positions.
Having traded the week’s low in the 0.6180’s, during the Asian afternoon, Wednesday, 0.6190 is the key support level to monitor in the week ahead. The Kiwi again found support near 0.6190 during Friday’s local session.
A break below likely opens a path to 0.6025, the 50% Fibonacci retracement of the October to February upswing.
The major fear heading into Friday’s session was most certainly not of a banking failure, but rather another stronger-than-expected non-farm payrolls number that would further increase the odds of the Fed stepping back up to a 50bps hike on 22 March.
Whilst the headline jobs growth number did beat the consensus forecast: 311K vs 205K, other data points within the report signalled labour market softness. In addition to downward revisions of over 30K jobs to previous months, the unemployment rate unexpectedly climbed from 3.4% to 3.6% whilst average hourly earnings logged a MoM reading of 0.2% (versus 0.3% expected), the lowest MoM reading in 12 months.
The immediate reaction from rates markets was to dial back expectations of a 50bps hike which had climbed beyond a 50/50 call following Fed Chair Powell’s hawkish testimony earlier in the week.
Market pricing now factoring a ~25% chance of a half-a-percent move on 22 March.
“Long and variable” are the two words favoured by the Fed and other central banks to describe the lag effects of monetary policy. It takes some time for tighter policy to feed into the broader economy as credit sensitive sectors, such as housing are the first to be impacted by higher borrowing costs.
The jobs market is typically one of the last components of the economy to be impacted, tipping over later in the cycle.
Despite resilient jobs growth, there are signs that the labour market is turning, such as Thursday’s jobless claims data point printing north of 200K for the first time in 8 weeks.
There is no doubt that activity data will deteriorate in the months ahead. How this will impact market sentiment depends on the pace of the decline.
Rapid – the market will move to price in an ugly recession.
Orderly – hopes of a softish landing will remain flickering.
The SVB headlines are a sign that market stress will be prevalent as the full impact of the Fed’s most aggressive tightening cycle in over four decades is felt.
Looking to the week ahead…..
The immediate focus will be on the evolving SVB story. Bloomberg reports that the FDIC has formed the Deposit Insurance National Bank of Santa Clara, to hold the assets of SVB. It said that insured depositors — those with $250,000 or less in their accounts — would have access to their money by March 13.
Typically, the FDIC sells the assets of a failed bank to other financial institutions and pays those with uninsured deposits out of those proceeds.
It is hoped that a buyer will emerge sometime through Monday.
If this occurs, expect a healthy bounce for risk assets, the New Zealand dollar to climb back towards 62 US cents…..perhaps beyond.
The headline event for the week is US CPI for February, the annualised core rate expected to fall from 5.6% to 5.5%. A downside miss would be celebrated, delivering a rebound for US stocks and pro-cyclicals including the Kiwi and Aussie dollars.
Other data points of note for the week include retail sales for the US and China, Aussie jobs, and Uni of Michigan Consumer confidence.
The key central bank event: the ECB’s interest rate decision, statement and presser during the early hours of Friday morning. The eurozone central bank is widely expected to hike by 50bps, lifting the main deposit rate to 3.50%.
The headline local event for the week is 4Q GDP, Thursday. The consensus forecast is for a -0.2% contraction in the last quarter for 2022.
Having fallen close to 7% from its 02 February peak near 0.6540, the Kiwi remains under pressure but did show basing signs last week, finding support on multiple occasions just below 62 US cents.
We think the start to the week may deliver a risk rebound provided a solution is found for SVB and its portfolio of start-ups, alleviating contagion concerns. An in-line or softer-then-expected US CPI print during Tuesday’s overnight session would further add to improving risk sentiment, helping NZDUSD to find a foothold above 0.62.
A hot CPI print would derail this thesis, placing a 50bps Fed hike back on the table, driving risk assets lower.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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