Through the first three months of 2023, uncertainty has emerged as the primary theme in finance. Bank failures and runaway inflation are driving monetary policy — with the end of Q1 upon us, are the markets ready to pick a direction? Perhaps late-March trade will provide some answers.
Compared to last week’s economic calendar, the coming five days are expected to be quiet. Of course, volatility knows no schedule! And, we still have a collection of events that can shake the foundations of asset classes across the board. So, let’s break down the key underpinnings of week 13.
Over the past 18 months, inflation has negatively impacted all of our lives. Inflation is the hidden tax, one that no one can avoid. But, are rising consumer prices beginning to taper? This week, we’ll look to the latest German CPI, EU CPI, and US PCE readings in an attempt to gauge price stability. The Wall Street consensus expects each of these numbers to come down from previous levels. If they don’t, brace for heavy volatility across the FX majors.
Aside from inflation, the world of finance continues to be a buzz over the recent banking meltdowns at Silicon Valley Bank, Signature Bank, and Credit Suisse. Many in the financial media believe the crisis to be over. In fact, in last Wednesday’s FOMC presser, Fed Chairman Jerome Powell stated that SVB was an isolated incident where management “failed badly.” So, is the US banking crisis of 2023 over? That is truly an unknown unknown and a situation that traders around the world are monitoring closely.
With inflation and banking pressures on the front burner, the markets have been in flux for the past two weeks.
After a heavy week of central bank action markets will be glad to take a breather on Monday as we start the week with a relatively light economy card. Whilst Chinese industrial profits will keep the Asia Pacific session busy, European traders will be focusing on the March Ifo Business Climate Changes out of Germany. As Q4 draws to a close, the question of an impending recession still hangs over Germany. Expect European markets to be sensitive to this key business sentiment data as the morning unfolds.
Key Market: DAX40
Australian Preliminary Retail Sales are expected to underwhelm in early Tuesday trading. The Aussie dollar has been very much in play with traders using it as a proxy for the ‘China Reopening’ narrative - yet to show signs of life. Consumer Retail Sales have fallen sharply since the RBA began hiking rates last April. With RBA’s Connolly speaking later that morning, we think a continued drop in retail sales will spell a pickup in AUDUSD volatility with a bias to the downside.
Key Market: AUDUSD
Crude oil hasn’t escaped the pressure of the recent banking sector crisis. The commodity complex has been in full on ‘risk-off’ mode. Last Monday’s mid 64’s support seems to have contained price action for now, despite market participants continuing to liquidate speculative long positions on the back of hopes Russian supply would edge lower. We could be at a stage where OPEC+ stepping in to announce further supply cuts is a real prospect. EIA Stock Changes in WTI will therefore be eagerly anticipated on Wednesday as traders look for clarity around how to play the energy sector as we move into Q2.
Key Market: WTI Crude Oil
The market has been preparing for the new BoJ Governor to begin his term for some time now. Many are looking to Kazuo Ueda to turn the Japanese around after decades of loose monetary policy. Japanese Unemployment Data is expected to hit the wires on Thursday and there is no denying that a continuation of the downtrend will leave the door open for further hawkish rhetoric. We favor yen strength in such a case so watch out for weakness in yen crosses.
Key Market: AUDJPY
Inflation has been the dominant market theme for over a year now. No one can deny the headline rate in the US has been falling steadily from the June 2022 highs of 9.1% to 6% two weeks ago. However, headlines are headlines, but the devil is in the details! All eyes will be on the Core PCE Price Index, set to be released early on Friday morning before the cash markets open. It’s proving stickier than the FED would like. Despite a complicated looking stock market, in reality we are still hanging onto the 2022 yearly close. Both doves and hawks will be looking to gain the upper hand. Friday could provide some much needed clarity.
Key Market: US500
So, how will the Greenback close Q1 2023? That's the trillion-dollar question and one that investors are going to answer beginning with Monday’s opening bell.
Right now, there is a growing belief that the USD is going to fade as the year progresses. In fact, derivatives traders are pricing a 95% chance of the Fed cutting interest rates ahead of Christmas. If they’re right, then we may have seen the worst of equities market angst and a top in the USD. If they’re wrong, then the dollar will be back in vogue and risk out of style. Only time will tell, so stay tuned!
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