T3 Monthly Insights - Feb 2023

1. The US dollar pared early gains to end the week almost flat at 104.6, as SVB’s collapse overshadowed Fed Chair Powell’s hawkish testimony last week and Friday’s strong jobs report. SVB’s failure has unnerved markets, which have reversed bets on the peak rate hitting 5.7% and markets now expect a peak rate of 5.3%. A 25bps rate hike is also considered more likely at this month’s Fed meeting, with some expecting a pause, a reversal from earlier when markets gave a 75% chance of a 50bps hike. As the Fed rolls out an emergency plan to backstop banks, promising protection for all SVB depositors, the dollar is expected to continue experiencing selling pressure in the short-term.

2. On the central banks' front, the ECB is all but set to raise rates by 50bps this Thursday, after repeated pronouncements from different ECB officials. There are growing signs of a rift between the hawkish and dovish camps in the ECB, with Holzmann arguing for 4 consecutive 50bps rate hikes from now till July, while Visco called for prudence given the uncertain macroeconomic future. Traders are looking closely to Thursday’s meeting, as the ECB is expected to release its inflation outlook which would indicate how much room exists for further rate hikes.

3. In the UK, disagreements are brewing between members of the Monetary Policy Committee, with BoE Governor Bailey expected to speak at a conference to provide clarity on the BoE's rate path moving forward. In Canada, the BOC is the first major economy to pause its rate hikes, which could cause it to weaken further in the current rising rate environment.

4. Meanwhile, gold rallied to $1900 per ounce as markets priced in a smaller rate hike of 25bps by the Fed and the SVB’s collapse has propped up demand for the safe haven. Given the expectation of continued FX volatility, we will maintain our cautious risk approach in capturing quality risk-adjusted returns across our trading portfolios.

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