Will the Fed Hike Rates Tonight Amidst Banking Sector Turmoil?

AUD

The Aussie dollar opens down against majors, with NZD being the exception, while the ASX closed 0.8% higher driven primarily by gains across consumer discretionary and financials. Some AUD weakness off the back of yesterday’s less-hawkish RBA Monetary Policy Meeting Minutes, where the Board considered only 25bps to be a viable option for the March hike. The Board reiterated that further policy tightening would likely be required given inflation remains too high and recent labor market & business surveys indicate solid activity. Our next noteworthy data will arrive on Friday morning, where Aussie Flash Services & Manufacturing PMIs are expected to gain further expansionary territory (although still only a little above 50.0). Tonight's US interest rate decision (see USD section below) carries with it an interesting risk implication in the event of a pause in the rate hike cycle due to recent instability in the banking sector. The AUD hates risk as we know...

USD

AUDUSD opens down at 0.6669 while another strong night saw Wall St trading firmly higher, with the NASDAQ +1.6%, S&P500 +1.4% and the Dow Jones +1.0%. We saw no US data, while notably Canada inflation continued to drop to 5.2% y/y in Feb. The data indicates Canadian CPI spiked in Feb 2022, largely driven by food, while their housing market and cost of shelter continue to cool. All eyes remain on tonight's interest rate announcement for the US, where the Fed is currently expected to hike by 25bps, and then maintain the rate at 5% before introducing rate cuts in the back end of the year. The Fed will of course need to be wary of the message a rate hike pause sends to high net-worth depositors in mid-tier banks, a perceived lack of confidence in banking stability could act as a catalyst for a bank run, the precise scenario that the Fed is desperate to avoid. Let's not forget the Fed has been constantly telling us that rates need to go higher and the inflation battle is not yet won, so a pause in rate hikes could expose a concerned Fed. This additional dynamic in tonight's decision makes it difficult to understand what currency market reaction may be in the event of a hike or otherwise; will risk sentiment or yield win the day? Buckle up.
 

EUR

AUDEUR opens down at 0.6194 while the DAX & CAC closed up +1.8% and +1.4% respectively after the ECB’s Kazaks hit the wires saying European banks are well-capitalised & re-affirming further rate hikes are up for consideration. The German ZEW Survey for March fell to 13.0 from 28.1, driven by declining sentiment in the insurance industry given global banking volatility, although headline expectations remain in positive territory. Tonight, ECB President Lagarde is expected to speak on the broad economy at the ECB and Its Watchers conference, while on Friday, we’ll see eurozone PMIs. These tend to be market movers and are expected to continue the recent trend of improvement.
 

GBP

AUDGBP opens down at 0.5459 while the FTSE gained +1.8% after a quiet 24hrs in terms of data. Focus will remain on tonight’s CPI y/y figure which is expected to further the downward trend and re-enter single digit territory (9.9%, down from last month’s 10.1%). The Bank of England has set a much lower bar for pausing hikes, relative to the Fed and ECB, and so markets are expecting one more 25bps hike at Thursday’s meeting. Last month, the BOE signaled it may finally be done with interest rate tightening, especially given recent encouraging signs that inflation may be easing off. Lower consumer demand and improved supply chains are keeping a lid on goods price growth, while reduced gas prices are supporting the services sector. Currently, market pricing reflects a pause in either April or May.

NZD

AUDNZD opens up at 1.0768 after Westpac Consumer Confidence data rose 2.1 points to 77.7 in March. Even so, consumer confidence continues to languish at historically low levels as households grapple with cost of living pressures and a deepening downturn in the housing market. No Kiwi data until next Thursday, where we’ll get insight into confidence levels within the business sector.