By Stuart Talman, XE currency strategist
A degree of calm has been restored, US equities and other risk assets climbing during Thursday’s sessions amidst news that the Swiss National Bank has stepped in to assist Credit Suisse, delivering a ~$50 billion Swiss franc lifeline to ward off a potential failure.
Heading into the New York afternoon, the S&P500 is up around 1% whilst the Nasdaq outperforms, adding circa 2% as the eye watering bond market volatility of the past few days recedes. The yield on the benchmark US 10-year bond has formed a base around 3.40%, climbing back through 3.50%, but still well-off early March highs, north of 4.00%.
Global bond yields had plummeted late last week amidst fears that troubled US regional banks could trigger a widespread global banking crisis.
For the time being, it appears this will be avoided.
The New Zealand dollar has failed to benefit from the market’s brighter mood, sitting at the bottom of the G10 leader board, shedding around a third-of-a-percent, weighed down by a weaker than expected 4Q GDP release during yesterday’s local session.
The New Zealand economy contracted by -0.6% (vs -0.2% expected) in the three months to December 2022 following a 1.7% gain in the previous period. The sharpest contraction since 3Q 2021, and well below the RBNZ’s February MPS forecast of +0.7%, the slower than expected pace of growth may lead the RBNZ to rethink its late cycle path, leading to a lower terminal rate 5.50%.
Prior to the release, the Kiwi was trading just below 62 US cents, nosediving to 0.6140 in the quarter-hour that followed. Offshore trade has seen NZDUSD track sideways, ranging between 0.6150 and 0.6180.
The other tier 1 macroeconomic data release from Thursday was Aussie jobs numbers for February. It was a hot report – jobs growth of over 64K (vs 48.5K expected) and the unemployment rate falling from 3.7% to 3.5% throws into question the RBA’s recent forward guidance…..are there more rate hikes to come rather than one then and a pause?
Certainly, if jobs numbers continue to maintain this strength, the RBA likely lifts the cash rate through 4.00% (current level at 3.60%).
The double whammy of weak local GDP and strong jobs across the Tasman caused the antipodean cross to reverse off yesterday’s upswing high, NZDAUD marking Thursday’s lows a pip or so above 0.9260.
Rebounding close to 4% over the past four weeks, the rate sensitive pair may enter a period of consolidative, range bound trade given a convergence of central bank relativities between the RBNZ and the RBA – the former less hawkish, the latter less dovish.
We have been calling for a 0.9050 to 0.9350 range to form.
Turning our attention back to offshore news, the headline event for Thursday - the ECB’s interest rate decision, delivered a 50bps hike. The key takeaways:
- ECB hikes refi rate by 50bps to 3.50%
- Refrains from providing forward guidance
- ECB forecasts no recession for 2023 or 2024
Central banks have a tough balancing act having to choose between financial stability and price stability. Following news that the SNB had provided Credit Suisse a lifeline, the ECB was given the greenlight to continue its fight on inflation. Sources have confirmed that the decision was a choice between no hike or 50bps…..a quarter-percent hike was not discussed.
The past few days have been a reminder to the ECB and other central banks that this late cycle period will be much harder to navigate than what has unfolded up to this point. The risk of a policy overstep has ratcheted higher.
Whilst ECB President Lagarde commented that there was more work to be done, the ECB likely steps down to a 25bps increment at its early April meeting with a pause approaching sometime in 2Q.
The Kiwi trades flat against the euro having climbed from daily lows near 0.5790 to log its high a couple of pips through 0.5830. Downside pressure remains for NZDEUR having marked 5 moths lows earlier in the week.
If a widespread banking crisis is avoided leading to a more positive risk backdrop, we’d need to see NZDEUR re-establish a foothold above old 0.5880 support to shift the bias from down to neutral. The pair continues to struggle to break up through descending trendline resistance.
Looking to the day ahead, given it’s an uneventful 24 hours for data releases, banking industry news flow, or a lack thereof will continue to be key driver.
California based First Republic Bank was the latest regional US bank to hit the headlines actively discussing options for a lifeline with JP Morgan, Bank of America and Citigroup participating. With assets of around US$200 billion, First Republic Bank provides full-service banking and wealth management services to a high net-wroth clientele.
In the absence of any negative banking headlines, the market may (prematurely) conclude that the worst is now behind us……risk assets rally into the weekend.
We look for the Kiwi to end the week logging small gains, tracking back near 62 US cents.
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Stuart Talman is Director of Sales at XE. You can contact him here.
1 Comments
'If a widespread banking crisis is avoided'
If a crisis is not avoided then NZ bank deposits are a sitting duck.
I can't believe the absolute incompetence of the current govt. Deposit insurance is obviously required - now.
I cannot believe how slow, shambolic and retarded the response of the govt to an oncoming disaster is.
Moral suasion is not a real thing. People have little or no choice but to leave the bulk of their savings in the safest bank they can think of.
I hope that if a crisis comes, then along with much of the NZ population the relevant govt ministers lose all their savings, all their assets as well as all their future job prospects.
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