NZD surges as US rate expectations tumble in wake of US banks collapse
Tuesday 14 March, 2023
Daily Currency UpdateThe New Zealand dollar was the best performer through trade on Monday, outpacing all other major counterparts as the fallout following the collapse of Silicon Valley Bank (SVB) continues to reverberate across financial markets. Despite the distinct risk-off environment, the NZD charged higher, buoyed by a steep correction in US rate expectations. The collapse in US 2- and 10-year treasury yields and adjustment in longer-run rate prospects outweighed risk aversion, helping lift the NZD back above US$0.62 and toward intraday highs north of US$0.6260. Reports New York-based Signature Bank has followed SVB into receivership have elevated concerns of contagion and a run on the banks. Despite officials’ efforts to contain fears and sure-up deposits, markets have sought to identify those institutions with similar exposures to SVB, selling stocks in those with the highest percentage of uninsured deposits. Despite the persistent threat of inflation, markets have all but priced out any possibility of a Fed rate hike next week. In this environment, it is almost impossible for policymakers to lift rates. The narrative has flipped again with markets unwinding Fed rate expectations as financial conditions will likely tighten naturally as a result of SVB’s collapse as banks seek to attract depositors with higher interest rate returns. Assuming fears of contagion ease and risk appetite is restored, there is a path for the NZD to climb steadily on the heels of a weaker dollar while a full-blown banking crisis will drive demand for haven assets, lifting demand for bonds and driving the USD higher.
Key MoversThe US dollar was hit hard through trade on Monday as the fallout following Silicon Valley Banks' (SVB) collapse continues to send shockwaves through the market. Reports New York-based Signature Bank will follow SVB into receivership prompted investors to seek out banking institutions with elevated exposures across the tech sector and the highest percentage of uninsured deposits. Bank stocks tumbled despite assurances from key regulators and officials that deposits will be protected. Shockwaves were felt across equity markets and the yen and Swiss franc both outperformed, elevated by the risk-off shift, while the euro and GBP benefited from a weaker USD and shifting Fed rate expectations. Markets have rushed to re-price expectations for Monetary Policy change, unwinding rate hike prospects. Given the sudden shift in environment, it will be hard for the Fed to justify lifting rates next week. With interest rates expected to rise naturally as banks seek to win back depositors the need for Fed intervention is diminished. A stacked macroeconomic docket will continue to play second fiddle to fears of financial collapse and our attentions are firmly affixed to events across the US banking network.
- NZD/USD: 0.6150 - 0.6320 ▲
- NZD/EUR: 0.5720 - 0.5880 ▲
- GBP/NZD: 1.9320 - 1.9680 ▼
- NZD/AUD: 0.9220 - 0.9380 ▲
- NZD/CAD: 0.8420 - 0.8620 ▲