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Multi-Currency Fundamental Macroeconomic Update | 3.14.23US stock futures declined on Wednesday by about 0.1% after the previous day's market rally, in which all three major indexes finished higher. Dow rose by 1.06%, S&P 500 jumped by 1.65%, and the Nasdaq Composite rallied by 2.14%. The banking sector staged a comeback rally as investors shrugged off fears of a systemic risk. Investors look forward to retail sales and producer price index data on Wednesday, as well as earnings reports from Adobe, Five Below and Oatly, among others. Inflation slowed to 6% in February of 2023, in line with market forecasts, the lowest since September 2021, and compared to 6.4% in January. The Bank of England is expected to increase rates by another 25 basis points this month, marking the 11th consecutive rate hike. The British pound remained above its over three-month low of $1.18 touched on March 8th, holding around $1.21, its strongest level since February 21st. Investors await British finance minister Hunt's new budget due Wednesday. The growth in pay in Britain eased in the three months to January. Total pay grew by an annual 5.7%, slowing from 6.0% in the previous period, while pay excluding bonuses rose by 6.5%, down from 6.7%. The offshore yuan appreciated past 6.9 per dollar, recovering further from two-month lows on positive signs for policy continuity. The current central bank governor and finance and commerce ministers are set to keep their posts, which boosted the currency. China's inflation rate fell to a one-year low in February, and producer prices also declined for the fifth straight month in February. The People's Bank of China left its key lending rates unchanged for the sixth straight meeting, as widely expected. In regular trading on Tuesday, the Dow gained 1.06%, the S&P 500 jumped 1.65% and the Nasdaq Composite rallied 2.14%, with all 11 S&P sectors finishing higher led by communication services, technology and financials. Investors were betting that the worst of the fallout from the collapse of Silicon Valley Bank and Signature Bank had passed. The market also digested data showing US annual inflation slowed further to 6% in February, in line with expectations. Investors now look ahead to retail sales and producer price index data on Wednesday, as well as earnings reports from Adobe, Five Below and Oatly, among others. The annual inflation rate in the US slowed to 6% in February of 2023, the lowest since September of 2021, in line with market forecasts, and compared to 6.4% in January. Food prices grew at a slower rate (9.5% vs 10.1%) while the cost of used cars and trucks continued to decline (-13.6% vs -11.6%). Also, costs slowed sharply for energy (5.2% vs 8.7%) and fuel oil (9.2% vs 27.7%) with gasoline prices falling 2% after a 1.5% rise in January. On the other hand, prices rose faster for electricity (12.9% vs 11.9%) and shelter (8.1% vs 7.9%). Core inflation which strips out the cost of food and energy edged lower to 5.5% from 5.6%. Compared to the previous month, the CPI rose 0.4%, following a prior 0.5% gain and also matching forecasts. The core rate, however, edged higher to 0.5% from 0.4%, compared to forecasts of 0.4%. Inflation in the US remains three times above the Fed's target of 2%. source: U.S. Bureau of Labor Statistics The euro extended gains to trade above $1.07, hovering around its strongest level since February 14th, and up from a two-month low of $1.05 touched on March 8th. Global markets were hit by concerns over the US financial system despite US authorities' latest efforts to limit the fallout from the collapse of SVB , raising the chances that the Federal Reserve might take a more cautious approach and deliver a 25 basis point hike at the March meeting, instead of a 50 basis point hike previously expected. Meanwhile, investors await the European Central Bank's policy statement due on Thursday, with policymakers expected to raise interest rates by another 50 bps . Still, the bloc's central bank might adopt a more dovish tone due to the ongoing risks to financial stability. The dollar index traded around 103.5 on Wednesday, hovering near its weakest levels in a month as investors reassessed the outlook for Federal Reserve monetary policy in light of the recent turmoil in the US banking sector and the latest US inflation report. The greenback came under heavy selling pressure this week as the collapse of Silicon Valley Bank and Signature Bank fueled speculations that the Fed could pause its tightening campaign to avoid further risks to the financial system. Fresh data also showed that the annual inflation rate in the US slowed further to 6% in February, the lowest since September 2021, in line with expectations. Money markets are now pricing an 80% chance of a 25 basis point rate hike from the Fed next week, lower than the half-percentage point increase expected a week ago. The British pound held above $1.21, hovering around its strongest level since February 21st and remaining above an over three-month low of $1.18 touched on March 8th. Investors dumped the dollar on hopes the Federal Reserve might take less aggressive approach on monetary policy going forward after the collapse of Silicon Valley Bank put into question the strength of the US banking system. Elsewhere, the Bank of England is seen increasing rates by a further 25 bps this month, an 11th consecutive rate hike, before ending the current tightening cycle. On the data front, growth in pay in Britain, which the UK central bank is watching closely as it weighs up when to pause its run of interest rate hikes, eased in the three months to January. Total pay grew by an annual 5.7%, slowing from 6.0% in the previous period, while pay excluding bonuses rose by 6.5%, down from 6.7%. Investors now await British finance minister Hunt's new budget due Wednesday. The offshore yuan appreciated past 6.9 per dollar, recovering further from two-month lows on positive signs for policy continuity, with the current central bank governor and finance and commerce ministers set to keep their posts. The yuan also gained as the collapse of Silicon Valley Bank prompted US regulators to protect depositors and financial institutions, giving rise to speculations that the US Federal Reserve could take a less aggressive approach to policy tightening to avoid further risks to the financial system. Meanwhile, latest data showed that China’s inflation rate fell to a one-year low in February, bolstering bets that the central bank would maintain an accommodative stance. Producer prices also declined for the fifth straight month in February. Last month, the People's Bank of China left its key lending rates unchanged for the sixth straight meeting, as widely expected. The Swiss franc strengthened past 0.92 per USD, approaching the 18-month high of 0.9 touched on February 1st as fears surrounding the US financial sector pressured the dollar and erased expectations of sharp rate increases by the Federal Reserve . On the other hand, the hawkish outlook for the Swiss National Bank supported the local currency as policymakers continued to flag risks of elevated inflation due to the second-round effects of high energy prices. Domestic inflation jumped to 3.4% in February, well above the SNB's forecasts of 3% and market expectations of 3.1%, adding to bets that the central body will continue its rate-hiking path next week. Additionally, recent data showed that foreign exchange reserves at the SNB fell to CHF 770.6 billion in February, the lowest since 2019, suggesting the SNB was intervening in currency markets to support the franc. The Indian rupee depreciated past 82.25 per USD from the one-month high of 81.7 touched on March 3rd, weakening despite the sharp retreat in the DXY as strong import demand weighed on the local currency. The volatility of the greenback suggested that Indian investors also exited their short dollar positions, increasing selling pressure on the rupee. Still, concerns about higher inflation strengthened hawkish bets for the Reserve Bank of India. Retail prices rose by 6.44% annually in February, above expectations of 6.35%, and marking it the second month inflation surpassed the central bank’s upper target of 6%. Economists project the lender to raise its key rate by 25bps in the upcoming April meeting, prolonging the effort to curb elevated retail prices and erasing previous expectations that Indian borrowing costs could peak by the first quarter of 2023. The British pound held above $1.21, hovering around its strongest level since February 21st and remaining above an over three-month low of $1.18 touched on March 8th. Investors dumped the dollar on hopes the Federal Reserve might take less aggressive approach on monetary policy going forward after the collapse of Silicon Valley Bank put into question the strength of the US banking system. Elsewhere, the Bank of England is seen increasing rates by a further 25 bps this month, an 11th consecutive rate hike, before ending the current tightening cycle. On the data front, growth in pay in Britain, which the UK central bank is watching closely as it weighs up when to pause its run of interest rate hikes, eased in the three months to January. Total pay grew by an annual 5.7%, slowing from 6.0% in the previous period, while pay excluding bonuses rose by 6.5%, down from 6.7%. Investors now await British finance minister Hunt's new budget due Wednesday. The Turkish lira held at a record low of 18.9 per USD after the central bank of Turkey resumed rate cuts. The TCMB cut its main interest rate by 50bps to 8.5% in its February meeting, matching market expectations. It was the first rate decrease since November, aiming to further loosen financial conditions and stimulate the recovery of supply chains after the earthquake hit the country. The central bank has cut its key rate by 10.5 percentage points since September 2021, triggering a crisis for the lira, soaring inflation , and a largely unbalanced current account. Inflation in Turkey soared to 86% in October before easing back to 58% in January, as the lira plunged 55% since the start of the bank's loosening cycle and compounded surging energy costs that Turkey must import. The TCMB also extended anti-dollarization strategies to support the currency. The Russian ruble was steady at around 75 per USD in March, hovering close to its lowest since April 2022 amid limited foreign currency inflows to the national economy. Sanctions and embargos on the country's energy exports compounded the impact of lower international energy prices, reducing turnover for Russia's vital revenue source and limiting demand for the local currency. Data from the Finance Ministry showed that oil and gas revenues sank by 46.4% from the prior year. Lower energy sales hurt the ruble despite intervention by the CBR , which has been selling an average of RUB 8.9 billion worth of foreign currency per day since January to offset depressed capital inflows. Meanwhile, until April 6th, the Finance Ministry will be selling RUB 120 billion in foreign currency, as increased demand from China and India is expected to boost energy shipments. The Brazilian real was changing hands around $5.15, a dramatic reversal from an eight-month peak of $4.95 touched on February 2nd, as stronger-than-expected US economic data fanned concerns about an aggressive Federal Reserve , thus spurring demand for the dollar. However, the downside move has been limited by speculation that the Bank of Brazil would hold interest rates higher for longer. Officials kept the benchmark Selic at 13.75% for the fourth straight meeting in February, as projected, but struck a somewhat hawkish tone due to worries over rising inflation expectations. Policymakers and investors have been concerned about Brazil's fiscal policy since President Lula da Silva took office earlier this year. Lula has constantly hinted at the need to boost social programs and loosen inflation targets.
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by TayFx