FX Majors Weekly Outlook (20-24 March) | Forexlive

Depositors
are taking their money out of small banks to the “too big to fail” ones, as
people know that those would get a bailout in case we get a real crisis. This
is also why we got the report this weekend of midsize banks asking the FDIC to
insure all deposits for two years.

The most
notable mover the last week was the bond market. It’s most likely signalling
that the hard landing is near and that recent events will be enough to tip the
economy into recession soon and the Fed to reverse course.

Such a fast
repricing reminds me of a quote from Stanley Druckenmiller where he says to
“act first and research later. Markets move quickly, ideas spread fast,
especially good ones, so it pays to get positioned. You can always exit if your
research changes the story”.

Looking
ahead I would prefer to shy away from risk assets, especially if economic data
starts to worsen and, in such scenario, the US Dollar would appreciate as a
safe haven, especially against the commodity currencies.

Tuesday: Canadian
CPI is expected to ease to 5.4% vs. the prior 5.9% Y/Y and 0.4% vs. the prior
0.5% M/M. The Core measure is expected at 4.6% vs. the prior 5.0% Y/Y and 0.8%
vs. the prior 0.3% M/M. Given that this week the market will be focused on the
FOMC, we may see some defensive positioning into the announcement. So, the most
likely reaction, in my opinion, would be USD/CAD appreciating faster in case
the CPI misses and slower in case the CPI beats. The recent selloff in Oil
prices suggests that the market is positioning for a hard landing and in such
instances a commodity currency like CAD depreciates versus the US Dollar.

Wednesday: UK CPI is
expected at 9.8% vs. the prior 10.1% Y/Y and 0.6% vs. the prior -0.6% M/M. The
Core measure is expected at 5.8% vs. the prior 5.8% Y/Y and -0.5% vs. the prior
-0.9% M/M. A beat may give the GBP some short-term strength in light of the BoE
decision, but I would expect it to be faded. A miss, on the other hand, is
likely to cause a faster depreciation in GBP/USD. If the banking woes in the US
increase or if they indeed changed the macroeconomic picture for the worse, the
USD is more likely to appreciate as a safe haven going forward.

The market
prices a higher chance for the FOMC to raise interest rates by 25 bps this
week. The Fed doesn’t like to surprise on the way up, so they always follow
market pricing. A 50 bps hike would be a very aggressive move and would tank
the markets. A pause, on the other hand, may be a weak move and bring into
question the Fed’s resolve in fighting inflation. In my opinion, it’s likely
that we will see the Fed raising rates by 25 bps to show its commitment to
fight inflation but also to buy some time and see how things evolve in the next
weeks in the banking sector and in the economic data. I also expect them to
keep QT on autopilot. What the Fed will project in the Dot Plot is an even
bigger question mark. In my opinion, it’s likely that they will keep it
unchanged with the terminal rate at 5.00-5.25%, but I expect it to be followed by
some hawkish comments like “we are data dependent and may go higher if incoming
data warrants such a move”.

Thursday: The SNB is
expected to choose between a 50 and 75 bps hike after the recent inflation data
surprised to the upside. The current policy rate stands at 1.00%. Moreover, the
recent woes regarding Credit Suisse may weigh on the central bank’s decision
and probably lead to the less aggressive move.

The BoE is
expected to hike by 25 bps bringing the bank rate to 4.25%. The MPC will see
the UK CPI report before the vote and given the recent troubles in the banking
sector in the US and fears of spill over to Europe and UK, the MPC may vote for
no change in case CPI misses and a quarter-point increase in case CPI beats.
It’s very likely that we will see again a split in the voting with Tenreyro and
Dhingra probably voting for a rate cut.

US Jobless
Claims, in my opinion, will be a very important data from now on. The reason
revolves around the business sentiment around the recent banking troubles.
Recent events may have hit the future outlook and may lead to more layoffs as
businesses turn defensive and credit to small/mid companies may be tightened.
Initial Claims are expected at 199K vs. the prior 192K, and Continuing Claims
are seen at 1715K vs. the prior 1684K. I think a big jump in the data would be
bad for risk sentiment.

Friday: The
S&P Global US PMIs data is generally collected mid-month and released soon
after. This makes this report a hot one for the week in my opinion. We may see
how the events in the last weeks impacted business conditions. The
Manufacturing PMI is expected at 47.6 vs. the prior 47.3. The Services PMI is
expected at 50.8 vs. the prior 50.6. Finally, the Composite PMI is expected at
47.5 vs. the prior 50.1. I’m inclined to see a bearish reaction in both a miss
and a beat. With the former, the signal would be that the recent events have
worsened the economy, and with the latter, the Fed may keep at tightening
monetary conditions.