Dollar Flat as Some Calm Returns to the Markets

March 27, 2023
  • The key takeaway from last week’s central bank decisions is that banking sector stresses won’t derail the global fight against inflation; this seems to have been the correct approach; Fed expectations still need to adjust; key survey readings for March will continue rolling out
  • ECB officials are acknowledging some policy impact of the banking crisis; Germany reported its March IFO business climate survey; U.K. CBI reported its distributive trades survey for March; the shekel may come under renewed pressure as political tensions remain high in Israel
  • The RBA review may lead to a significant shakeup in its policymaking framework; meanwhile, markets are still looking for a pivot from the RBA

The dollar is flat as the new week starts off calmly. DXY is flat near 103.104 after two straight up days. We believe that markets are overestimating the Fed’s capacity to ease (see below) and so the dollar should eventually recover when expectations are repriced. The euro is trading higher near $1.0770 while sterling is trading higher near $1.2270. The yen is the worst performer today as risk off impulse ebb. USD/JPY is trading near 131.50 today. With the BOJ seen on hold for the foreseeable future and banking sector tensions easing, we believe USD/JPY remains a buy at current depressed levels. Bottom line: we expect the dollar rally to resume after this current bout of market turmoil fades and markets are one again able to focus on the fundamentals.


The key takeaway from last week’s central bank decisions is that banking sector stresses won’t derail the global fight against inflation. After the Fed hiked 25 bp Wednesday, others followed suit Thursday as the Swiss National Bank hiked 50 bp, Norges Bank hiked 25 bp, and the Bank of England hiked 25 bp. It wasn’t just Developed Markets, as Taiwan and the Philippines led the Emerging Markets central banks in hiking rates. It seems clear to us that most policymakers are looking beyond the recent banking sector developments and focusing on the need to limit price pressures.

This seems to have been the correct approach. While banking sector stresses remain, the world hasn’t ended and markets are seeing a degree of calm return. Indeed, the markets have so far digested this latest round of tightening pretty well. The major central banks seem to have successfully bought themselves some time. The next FOMC meeting isn’t until May 2-3. For the ECB, its next one is May 4 and for the Bank of England, it’s May 11. The Swiss National Bank has even more time as its next quarterly policy meeting isn’t until June 22. That leaves a lot of time for the banking sector crisis to be resolved before any of these major central banks need to decide on their next policy steps. Ahead of those meetings, we have the Reserve Bank of Australia decision April 4 and the Bank of Canada decision April 12. Believe it or not, WIRP suggests nearly 10% odds of a cut by the RBA and nearly 20% odds of a cut by the BOC. We find both of these to be highly unlikely.

Fed expectations still need to adjust. The next FOMC meeting is May 2-3 and WIRP suggests around 50% odds of 25 bp hike then. After that, it’s all about the cuts. Nearly three cuts by year-end are priced in and we continue to believe that any Fed easing is a 2024 story. In that regard, Powell said that Fed officials “just don’t see” any rate cuts this year. There are plenty of Fed speakers this week and will likely shed more light on where the Fed consensus now stands. Jefferson speaks today. Over the weekend, Kashkari said that the banking sector crisis has increased the risks of recession but added that it was too soon to say what it means for Fed policy. We concur.

Key survey readings for March will continue rolling out. Dallas manufacturing survey will be reported and is expected at -10.0 vs. -13.5 in February. Chicago PMI Friday will be key and is expected at 43.0 vs. 43.6 in February. Last week, preliminary March S&P Global PMIs came in much stronger than expected, with the composite rising to 53.3 vs. 51.1 in February. This was the highest since last May.


ECB officials are acknowledging some policy impact of the banking crisis. Nagel said while he said that a meeting by meeting approach is becoming more important, “Rest assured, however, that we’ll continue to move forward resolutely on the path of monetary normalization until inflation is contained and price stability is restored.” He added that the ECB should soon be in a position to accelerate its Quantitative Tightening, which started this month. Elsewhere, de Cos said that “In light of the current elevated uncertainty, the most sensible thing to do is to emphasize that our future monetary-policy decisions will depend more than ever on how the different sources of risk materialize, including experiences in recent days in financial markets.” Lastly, Simkus said that financial stability is an important factor in assessing the transmission of the ECB’s monetary policy,

Markets have repriced the ECB tightening outlook. The next policy meeting is May 4 and WIRP suggests nearly 80% odds of a 25 bp hike then. After that, odds of another 25 bp hike top out near 85% in Q3 and so the peak policy rate is back up to near 3.5%. A rate cut is priced in by year-end, which seems very unlikely. There are plenty of ECB speakers this week and we expect the debate between the hawks and doves will remain intense. Besides the trio cited above, Elderson, Centeno, and Schnabel also speak today.

Germany reported its March IFO business climate survey. Headline came in at 93.3 vs. 91.0 expected and 91.1 in February, as both the current assessment and expectations components rose to 95.4 and 91.2, respectively. This was the highest headline reading since last February and continues a string of strong survey readings from the eurozone. German April GfK consumer confidence will be reported Wednesday and is expected at -29.5 vs. -30.5 in March.

The U.K. CBI reported its distributive trades survey for March. Retailing reported sales came in at 1 vs. -3 expected and 2 in February, while total reported sales came in at 8 vs. -12 in February. Many analysts are saying that the U.K. could avoid recession this year but we believe this is too optimistic.

Bank of England tightening expectations remain subdued. The next policy meeting is May 11 and WIRP suggests around 75% odds of a 25 bp hike, with odds of another hike topping out near 35% in Q3. After that, there are some odds of rate cut that would take the bank rate back down to 4.25% by year-end. With inflation still rising, a rate cut this year seems very unlikely. The bank releases its financial policy summary Wednesday. There will be some key BOE speakers this week. Bailey speaks Monday. He then testifies before Parliament on SVB Tuesday. Mann speaks Wednesday.

The shekel may come under renewed pressure as political tensions remain high in Israel. Prime Minister Netanyahu dismissed Defense Minister Gallant over the weekend after his call for a delay in the government’s controversial judicial overhaul that is scheduled to be voted on this week. Gallant is a member of Netanyahu’s Likud party and so his dissent shows a growing split even amongst Netanyahu’s own supporters. Indeed, Economy Ministry Barkat is reportedly urging a pause in the judicial reforms as well. However, right-wing ministers are reportedly threatening to break up the ruling coalition if Netanyahu agrees to a delay. After Gallant’s sacking, mass protests erupted across the nation this weekend and have continued today.


The Reserve Bank of Australia review may lead to a significant shakeup in its policymaking framework. The review will be delivered to Treasurer Chalmers by the end of this week. In turn, he is expected to release the findings and an initial government response before the federal budget is announced May 9. Reports suggest one option is the formation of a monetary policy board made up of economic experts which would be complemented by a separate governance board overseeing operational matters such as the RBA’s risk management, technology and human resource remits. This is similar to the existing structures of the Bank of Canada and the Bank of England. A second reported option would be the creation of a more formal selection process of members to the RBA board to make sure it has the optimal mix of broad-based skills across many disciplines.

In the meantime, markets are still looking for a pivot from the RBA. The next policy meeting is April 4 and WIRP suggests around 5% of a cut then. A cut becomes fully priced in for the August 1 meeting, followed by 50% odds of another cut by year-end. We believe an easing cycle this year is very unlikely. February CPI data Wednesday will be important and headline is expected at 7.2% y/y vs. 7.4% in January. If so, it would be the second straight month of deceleration but would remain well above the 2-3% target range. February retail sales data tomorrow (0.1% m/m expected) and private sector credit data Friday (0.4% m/m expected) will also be closely watched.

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