Dollar Consolidates Ahead of ECB Decision

March 16, 2023
  • Markets have calmed but financial stability risks remain in play; Fed expectations have downshifted because of the SVB failure; February PPI surprised to the downside; retail sales data were mixed; regional Fed surveys for March will keep rolling out
  • The SNB finally committed to a full back stop of troubled Credit Suisse; the ECB decision today is going to be a close call; U.K. Chancellor Hunt announced an expansionary budget; BOE tightening expectations have evaporated
  • Japan reported January trade and core machine orders; recent data should keep the Bank of Japan on hold near-term; Australia reported firm February jobs data; New Zealand reported weak Q4 GDP data; Indonesia kept rates steady at 5.75%, as expected

The dollar is consolidating as markets calm ahead of the ECB decision. Global equities are higher and global bond prices are lower, but the yen and Swiss franc are outperforming today. DXY is trading lower near 104.512 after trading as high as 105.103 yesterday. We believe that the dollar smile is back in play, as it benefits from risk off sentiment and is poised to benefit as Fed tightening expectations eventually recover. There is simply no way the Fed cuts 2-3 times by year-end as market pricing implies (see below). The euro is trading higher near $1.0615 ahead of the ECB decision (see below). Sterling is underperforming after a disappointing budget yesterday (see below) and is trading lower near $1.2050. USD/JPY is trading lower near 132.80 after trading above 135 yesterday as the yen continues to benefit from the risk off impulses. With the BOJ seen on hold for the foreseeable future, we believe USD/JPY is a buy at current depressed levels. Bottom line: we expect this current bout of market turmoil to continue fading as systemic risks seem low to us.


Markets have calmed but financial stability risks remain in play. First Republic Bank was cut to junk by S&P and Fitch yesterday. The bank said that it is exploring strategic options including a sale. It is also weighing options for shoring up liquidity. Elsewhere, the SNB committed to backstop Credit Suisse (see below), which has led European bank shares about 1.5% higher today. Global bond yields are creeping higher, while global equity markets are mixed. The dollar is trading slightly softer after yesterday’s surge. All in all, this calm is welcome but it still feels like markets are waiting for more shoes to drop. For now, policymakers are taking the right steps to calm sentiment. Today’s ECB decision will be key (see below) but we continue to believe that this week’s repricing of global central bank tightening (easing?) expectations is way overdone. Our key investment calls: buy the dollar, sell the short end of global bonds, and sell equities and EM.

Fed expectations have downshifted because of the SVB failure. We couldn’t disagree more. WIRP suggests a 25 bp hike March 22 is only about 75% priced in, rising to fully priced in for May 3. Furthermore, two or three 25 bp cuts are priced in by year-end and that is simply not going to happen. Period. Because the media embargo went into effect midnight Friday, there will be no Fed speakers until Chair Powell’s post-decision press conference March 22. We expect him to remain suitably hawkish whilst leaving the Fed maximum optionality going forward. That said, we see much greater risks that the market is underestimating future tightening and overestimating future easing.

February PPI surprised to the downside. Headline came in at 4.6% y/y vs. 5.4% expected and a revised 5.7% (was 6.0%) in January, while core came in at 4.4% y/y vs. 5.2% expected and a revised 5.0% (was 5.4%) in January. The thing to remember is that just because producers are seeing lower inflation doesn't mean that they will pass it on to the consumers. Right now, pricing power seems pretty strong for U.S. firms and we don't think they are ready to give up that power just yet. Stay tuned.

Retail sales data were mixed. Headline came in as expected at -0.4% m/m vs. a revised 3.2% (was 3.0%) in January, while sales ex-auto came in as expected at -0.1% m/m vs. a revised 2.4% (was 2.3%) in January. Of note, the control group came in at 0.5% m/m vs. -0.3% expected and a revised 2.3% (was 1.7%) in January. Of note, the Atlanta Fed’s GDPNow model is now tracking 3.2% SAAR growth for Q1, up from 2.6% previously. If this is sustained, it would be the third straight quarter of abo e trend growth. The next model update comes today after the data. Weekly jobless claims, February import/export prices, building permits, and housing starts will all be reported.

Regional Fed surveys for March will keep rolling out. Philly Fed is expected at -15.0 vs. -24.3 in February. Yesterday, Empire survey kicked things off and came in at -24.6 vs. -7.9 expected and -5.8 in February. As such, we see downside risks to today’s report from Philly. February IP will then be reported tomorrow and is expected at 0.2% m/m vs. flat in January. Manufacturing is expected at -0.3% m/m vs. 1.0% in January.


The Swiss National Bank finally committed to a full back stop of troubled Credit Suisse. The baton has been passed by the U.S. to Europe in terms of financial stability concerns, as Credit Suisse emerged as the nexus of risks. The Swiss National Bank belatedly pledged to backstop Credit Suisse late yesterday. Credit Suisse later said it will borrow as much as CHF50 bln ($54 bln) from the SNB’s liquidity facility as it gears up for an offer to repurchase outstanding debt. The bank will reportedly make a tender offer to buy back up to CHF3 bln of dollar- and euro-denominated debt. The turmoil comes just about a week before the SNB holds its quarterly policy meeting, where it is expected to hike rates 25 bp to 1.25%. The market is pricing in a peak policy rate near 1.75%, which sounds about right to us. Here too, we do not think troubles at Credit Suisse will derail the tightening cycle.

The European Central Bank decision today is going to be a close call. Because of the banking stresses spreading to Europe this week, WIRP suggests only 60% odds of a 50 bp hike today vs. less than 15% yesterday but fully priced in at the start of this week. The odds have risen today on the SNB backstop. We look for a 50 bp hike today coupled with a dovish shift in the forward guidance as President Lagarde hammers out another compromise. Whether it’s 25 or 50 bp, the forward guidance will be key as the hawks and the doves slug it out. Some of the hawks have talked about four straight 50 bp hikes, while the doves have talked about a meeting by meeting approach. Looking ahead, the next 25 bp hike isn’t fully priced in until September 14. After that, the odds of one final 25 bp hike in Q4 top out near 25%and so the peak policy rate is seen near 3.25%, down from 4.0% at the start of this week. Given how high inflation remains, we think this expected rate path seems too low. Fresh macro forecasts will be released today. We expect growth forecasts to be raised modestly and headline inflation forecasts to be cut modestly.

U.K. Chancellor Hunt announced an expansionary budget. How expansionary? The tax breaks and giveaways average GBP21.5 bln per annum in the first three fiscal years starting this FY23-24 and then fall to GBP10.4 bln by FY27-28. For FY23-24 alone, the budget sets out GBP8.5 bln of additional spending and GBP13.3 bln of tax breaks. It’s a clear reversal of the austerity that Hunt was forced to announce after he took over last fall. Since then, the economy has performed a bit better than expected, giving him some leeway to offer some goodies. That said, the macro forecasts seem too optimistic. For instance, Hunt sees the U.K. avoiding recession this year and inflation ending 2023 near 2.9%. The OBR gives its budget briefing today.

BOE tightening expectations have evaporated. WIRP suggests a 25 bp hike March 23 is about 50-50 and isn’t fully priced in until the May 11 meeting. After that, the odds of another 25 bp hike top out near 30% in Q3 and so the policy rate is expected to peak near 4.25% vs. 4.75% at the start of this week and 6.25% right after the disastrous mini-budget back in September. We’d also like to point at that because the BOE started tightening in December 2021, the economy is just starting to feel the impact as 2023 gets under way and so there are still headwinds ahead. As such, Hunt’s call for no recession is likely too optimistic.


Japan reported January trade and core machine orders. Core machine orders came in at 4.5% y/y vs. -3.9% expected and -6.6% in January. This was the first positive reading since October and the strongest since August. Of note, the gain was driven largely by domestic demand, which rose 8.2% m/m and 5.7% y/y. This simply confirms our belief that China reopening continues to have very little impact on regional growth and activity. Elsewhere, exports came in at 6.5% y/y vs. 7.0% expected and 3.5% in January, while imports came in at 8.3% y/y vs. 12.4% expected and 17.5% in January.

Recent data should keep the Bank of Japan on hold near-term. WIRP suggests around 10% odds of liftoff April 28, rising to around 30% June 16 and then 60% for July 28. A hike isn’t fully priced in until October 31. In addition, the subsequent tightening path is seen as very mild as the market is pricing in only 10 bp of tightening over the next 12 months followed by only 15 bp more over the subsequent 24 months. That is why we expect any knee-jerk drop in USD/JPY after liftoff to be fairly limited.

Australia reported firm February jobs data. 64.6k jobs were added vs. 50.0k expected and a revied -10.9k (was -11.5k) in January, while the unemployment rate fell two ticks to 3.5% vs. 3.6% expected. This is just a tick above the cycle low from October and suggests the labor market remains very tight. The details were strong, as 74.9k full-time jobs were added and were only partially offset by -10.3k part-time jobs. Despite the strong labor market data, WIRP suggests 15% odds of a 25 bp CUT at the next meeting April 4. Why should banking sector developments in the U.S. and Europe impact RBA policy? The answer is that it shouldn’t. We simply cannot fathom a rate cut when unemployment remains so low.

New Zealand reported weak Q4 GDP data. GDP came in at -0.6% q/q vs. -0.2% expected and a revised 1.7% (was 2.0%) in Q3. The y/y rate slowed to 2.2% vs. 3.3% expected and 6.4% in Q3. WIRP suggests a 25 bp hike is about 70% priced in for the next meeting April 5. Looking ahead, the market is pricing in a peak policy rate between 5.25-5.5%, down from 5.5-5.75% last week. Here too, we do not think RBNZ policy should be impacted by the SVB-related crisis.

Bank Indonesia kept rates steady at 5.75%, as expected. Governor Warjiyo said again that there’s no need to raise interest rates further to fight inflation, just as he said at the last meeting in February. Warjiyo stressed that “BI’s interest rate policy is based on expectations and projections of inflation, balanced with economic growth,” adding that current rates are “enough.” He noted Ramadan festivities could boost inflation through next month but added that headline inflation would return to the 2-4% target range by September. Today’s decision supports our view that the tightening cycle has likely ended.

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