Central bank rate bets send US dollar, sterling, Swiss franc different ways

THE US dollar fell and sterling steadied on Tuesday (Mar 21) as traders reckoned banking stress could keep the Federal Reserve and the Bank of England (BOE) from hiking rates much further, or at all, later in the week.

Investors’ focus has moved to a slew of central bank meetings due this week after days of volatility in markets caused by worries over the stability of the global banking sector.

The Swiss franc rose sharply against the US dollar on expectations of a 50-basis-point (bp) hike on Thursday from the Swiss National Bank, matching the European Central Bank’s increase last week, as tackling inflation trumps concerns about financial market turmoil, a Reuters poll indicated.

The US dollar index fell 0.3 per cent to 103.02. The Swiss franc rose 0.6 per cent to US$0.92355, while sterling edged 0.2 per cent lower to US$1.2249.

Markets are pricing in an 85 per cent chance of a 25-bp hike when the Fed announces its monetary policy decision on Wednesday. The Fed hikes’ peak was 5.5 per cent only a few weeks ago, against 4.8 per cent now.

The US dollar has followed those expectations lower, though general nervousness in financial markets has tempered selling.

“Volatility in rates and the broader asset markets has been extraordinary recently,” said John Velis, FX and macro strategist for the Americas at BNY Mellon, causing a “substantial repricing” of future rate hikes.

Sterling moved a tad lower, staying close to an almost seven-week high against the US dollar, after data showed Britain recorded a budget deficit of £16.68 billion (S$27.3 billion) in February, far above expectations in a Reuters poll.

“UK government borrowing data brought mixed news,” said Shaun Osborne, chief currency strategist at Scotiabank. While the borrowing requirement was high, “the government looks likely to undershoot borrowing estimates for the full year... That might mean more room for pre-election “sweeteners” later this year,” he said.

With UK inflation data on Wednesday expected to show some easing and amid the global financial market instability, money markets are now pricing in a 45 per cent chance of no interest rate hike by the BOE on Thursday and a 55 per cent chance of a 25 bps increase.

Norway’s central bank Norges Bank is expected to raise its benchmark interest rate by 25 bps to 3 per cent this week to curb inflation and prop up a weakening currency, according to a Reuters poll.

The Norwegian krone surged 1.2 per cent to 10.0913 per US dollar, set for its biggest daily jump in almost six weeks, after falling last week to its lowest since early October.

On Tuesday, minutes showed that Australia’s central bank had agreed on Mar 7 to consider the case for a rate pause at its April policy meeting, even before the recent bout of volatility weighed on the Aussie, which dropped 0.55 per cent to US$0.6682.

The euro rose 0.5 per cent to US$1.07805 after the ZEW economic research institute said on Tuesday that German investor sentiment continued on the path to recovery last month.

But sentiment is fragile as investors are concerned over the outlook for the banking sector after US lender First Republic shares tumbled nearly 50 per cent on Monday on fears it will need a second rescue.

European banks rallied on Tuesday for a second consecutive day, as some of the initial concern sparked by UBS Group’s state-backed takeover of Credit Suisse eased.

A top European Union securities regulator said on Tuesday that reforms to tackle vulnerabilities in money market funds were urgently needed for the sector to cope better with economic shocks.

The US dollar rose 0.86 per cent against the yen to 132.4 after recording on Friday its biggest daily fall against the Japanese currency in more than two months. REUTERS