Weekly FX Market Recap: Mar. 6 – 10, 2023

Risk-off behavior dominated the financial markets most of the week as traders juggled between a hawkish interest rate outlook against negative headlines from the U.S. banking sector.

Benefiting from both broad risk aversion conditions and Swiss economic updates showing strong labor and inflation conditions continue, it was no surprise that the Swiss franc easily took the top spot among the FX majors at the Friday close.

Notable News & Economic Updates:

Chinese government sets modest growth target of “around 5%” for 2023 during annual National Party Congress versus analysts’ expectations of at least 5.5% economic expansion

China’s trade surplus beat $81.8B expectations at $116.9B in the January-February period, but underlying components reveal that exports fell 6.8% y/y and imports tumbled 0.2% y/y, contracting deeper than expected

Central bank updates:

• Fed Chairperson Powell highlighted that data has been coming in stronger than expected, so ultimate level of interest rates likely to be higher than previously anticipated and they are prepared to increase the pace of hikes if upcoming data warrants it
• In his next speech in front of Congress, Powell clarified that they are not on a pre-set path and that no decision on hiking has been made yet for the March meeting
• ECB official Holzmann projected that the central bank will hike rates by 0.50% by four more times this year, as core inflation likely to remain steady for the first half of 2023
• RBA hiked interest rates by 0.25% from 3.35% to 3.60% as widely expected but toned down their hawkish remarks from the February meeting, citing that further tightening remains data dependent
• BOC kept interest rates on hold at 4.50% as expected, explaining their forecast that CPI is likely to come back down to their 3% target by the middle of the year
• BOJ kept monetary policy unchanged as expected, as officials voted unanimously to maintain the yield curve control in place

Crypto-focused bank Silvergate Bank confirmed that it will be shutting down operations, triggering another wave lower for bitcoin and altcoins

China’s consumer prices up by 1.0% y/y in February, its slowest increase in a year. Meanwhile, producer prices fell by a sharper 1.4% y/y in February (from -0.8% in January) and marked a fifth consecutive month of price declines

SVB Financial Group collapsed this week, sparking concerns that the banking sector may be in trouble due to rapidly rising interest rates.

China New Loans in February: 1.81T yuan (1.50T yuan forecast); M2 money supply grew by +12.9 y/y vs. +12.5% y/y forecast

On Friday, the highly anticipated U.S. employment report came in above expectations at 311K in February vs. a lower revised read of 504K in January.

Intermarket Weekly Recap

This week was for sure not for the faint of heart as traders had several top tier catalysts to maneuver through.

It started with a mixed mood on Monday as Friday’s optimistic tone shifted negative after Chinese GDP forecasts were revised lower and ahead of highly anticipated top-tier U.S. catalysts.

But Bond yields started picking up again in Europe, as the spotlight turned to hawkish commentary from ECB official Holzmann and later on Powell’s ultra-hawkish speech to Congress on Tuesday.

ICYMI, the Fed head reminded market watchers that economic data has been coming in much stronger than expected, so they would not hesitate to step up their tightening efforts.

Not surprisingly, this triggered a big run-up for the Greenback and U.S. bond yields, even triggering the largest 2-year and 10-year yield curve inversion in roughly 40 years!

On the other side of the risk spectrum, equities and commodities suffered huge blows, as investors priced in the potential impact of higher borrowing costs on business activity and investment. The S&P 500 fell 1.50% below the key 4,000 mark while the Nasdaq slumped 1.2% following Powell’s Tuesday testimony.

Crude oil extended its slide, following the weaker-than-expected growth target from China, as OPEC Chief Haitham Al-Ghais also noted oil consumption in the U.S. and Europe is slowing. Precious metals were also on shaky footing, particularly copper which was bogged down by weaker imports activity and easing supply constraints in Peru.

Adding another punch in the gut for commodity currencies were the cautious remarks from both the RBA and BOC in their monetary policy announcements, suggesting a slower pace of hiking or an extended pause.

Although Powell attempted to downplay the Fed’s aggressive hiking bias in his Wednesday in front of Congress (citing that no decision has been made for March just yet), stronger than expected leading jobs indicators like the ADP and JOLTS figures kept bullish vibes in play for the dollar and bond yields.

It wasn’t until Uncle Sam printed downbeat weekly jobless claims and some weak spots in the Challenger job cuts report that market players decided to take it easy with their pro-dollar positions.

However, U.S. equity markets and risk-on traders were barely able to take advantage, as financial and banking stocks weighed on major indices after fresh negative headlines hit the wires late in the Thursday session.

The negative risk moves were due to news that Silicon Valley Bank (the preferred banking institution for tech startups and VC’s) was hit with a bank run and that SVB Financial Group (SVB’s parent company) dumped $21B worth of securities and held a share sale to shore up finances.

While this does not seem to have systemic risk to the banking system at this time, it does bring to the forefront issues that banks have with rapidly rising interest rates. This is mainly the pressure banks are seeing to raise deposit rates for depositors vs. being locked into low-yielding debt positions accumulated during the previous lower interest rate regime.

On Friday, we finally got to the highly anticipated U.S. employment update, which came in arguably net positive for risk-on sentiment. While the net job additions was once again much higher than expected at 311K (225K forecast), it was below the previous month’s gain and the unemployment rate ticked higher to 3.6%. Also, average hourly earnings came in below expectations at 0.2% m/m (0.3% m/m forecast), which all put together on net, lowers the argument a bit for an aggressive rate hike outlook.

In recent history of market behavior, risk-on assets would tend to rip higher in this scenario, but it seems that traders quickly flipped focus back to the Silicon Valley Bank story, which was updated with news that Silicon Valley Bank would be shut down and taken over by regulators. This seems to have prompted further risk aversion behavior, characterized by a further move lower in equities while gold, bonds and safe haven currencies rallied into the weekend.

Most Notable FX Moves

USD Pairs

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated… If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” – Fed Chairperson Powell

ADP non-farm employment change at 224K vs. 200K estimate in February, previous reading upgraded from 106K to 119K

JOLTS job openings came in at 10.824M vs. 10.546M expected for January, previous reading upgraded from 11.01M to 11.23M

Challenger job cuts slowed from 440% year-over-year to 410.1% in February with 77.7K layoffs vs. previous 102,943K increase in joblessness, suggesting potential rise in claims in the coming weeks

Fed’s Beige Book said the labor market remained “solid” in February even if there were “scattered reports of layoffs” and while “finding workers with desired skills or experience remained challenging.”

U.S. Non-Farm Payrolls report shows a net jobs gain of 311K in February vs. a slightly revised lower 504K in January (224K forecast); the unemployment rate ticked higher to 3.6%; average hourly earnings rose by only +0.2% m/m

CHF Pairs

Swiss CPI surprises to the upside with 0.7% month-over-month gain for February versus estimates of a slower 0.5% uptick and previous 0.6% gain

Switzerland’s jobless rate dipped from 2.2% to 2.1% in February

SNB Chairperson Jordan says that inflation is still above their price stability target, so they cannot rule out the possibility of further tightening

AUD Pairs

MI inflation gauge slowed from 0.9% to 0.4% m/m in February, keeping annual headline figure at 6.3% and core inflation down from 5.3% to 4.9% year-over-year

RBA hiked interest rates from 3.35% to 3.60% as expected but omitted “further increases in interest rates will be needed over the months ahead” in exchange for “further tightening of monetary policy will be needed to ensure that inflation returns to target“

RBA Governor Lowe acknowledged that they are nearing a point where they might need to pause hiking, citing the risk of an economic slowdown in their effort to bring inflation back to target

Chinese CPI slowed from 2.1% to 1.0% year-over-year in February vs. projected dip to 1.9%, producer prices posted steeper 1.4% year-over-year slump vs. estimated 1.3% decline and earlier 0.8% drop

CAD Pairs

Ivey PMI slid from 60.1 to 51.6 in February vs. projected 55.9 figure, reflecting significantly slower industry expansion as both prices and employment components tumble

BOC kept interest rates on hold at 4.50% as widely expected but kept the door open for more hikes if needed since they expect their previous tightening moves to bring CPI down to their 3% target by the middle of 2023

Canada added a net 21.8K jobs (150K in January) in February while the unemployment rate held at 5.00%; permanent worker wages rose by 5.4% (the highest rate since November)

JPY Pairs

Japan’s real wages dropped by 4.1% y/y in January, marking the 10th consecutive monthly decline and the fastest decrease since May 2014.

Japanese Economy Watchers Sentiment index improved from 48.5 to 52.0 vs. 49.1 forecast in February, reflecting shift to optimism

Japan’s annualized GDP revised lower from 0.6% to 0.1% in Q4, with domestic demand shrinking more than initially estimated

BOJ kept monetary policy unchanged as expected, as Governor Kuroda gears up for transition to Ueda’s leadership. Vote to keep yield curve control in place was unanimous.