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With tensions continuing to ease across the global banking sector, high-risk currencies are edging higher and the dollar is retreating from its recent highs. Trading volumes in bond markets are beginning to subside – but with investors reducing bets on a turmoil-induced pivot in central bank policy, rates are moving upward. The US two-year is yielding more than 4 percent once again, and equivalent benchmarks in the euro area, United Kingdom, and Canada are climbing off levels reached last week.

The euro continues to march higher, with rising bond yields – supported by still-elevated inflation expectations – helping to push the exchange rate toward the 1.10 mark against the dollar. Upside surprises in consumer price data releases between Thursday and Fridaycould help the pair break resistance in the low 1.09 area, but political turbulence in France could upset the applecart once again, forcing President Macron to call a snap election and raising background concerns around debt sustainability in the core euro area countries.

In a speech yesterday and Parliamentary testimony this morning, Bank of England Governor Bailey sounded relatively hawkish, keeping rate expectations well supported. “We have to be very alert to any signs of persistent inflationary pressures. If they become evident, further tightening would be required,” he told an audience at the London School of Economics, “With this in mind, the Monetary Policy Committee’s response will be firmly anchored in the emerging evidence”. In Parliament, he said, “We see some evidence of tightening credit conditions, but we do not see a critical development in that respect”. The pound climbed back above the 1.23 threshold in response, with odds rising on a hike at the next meeting.

A raft of second-tier data releases will arrive in the US this morning. The Case-Shiller 20-city home price index is likely to show a 2.7 percent year-over-year gain in real estate values, hardly consistent with the policy-engineered slowdown that many market observers (including ourselves) have long expected to see. The Conference Board’s consumer confidence index – only partially captured after recent bank failures – is seen dropping to 100.7 in March, down from 102.9 in the prior month.

US recession bets look likely to become more entrenched in months to come, but  economic surprise indices – which can have a material impact on exchange rates – could turn more positive in the short run as Main Street proves more resilient than Wall Street. 

A Senate panel convened to investigate Silicon Valley Bank’s collapse will hear testimony from the Federal Reserve’s William Barr, Treasury’s Undersecretary Nellie Liang, and the Federal Deposit Insurance Corporation’s Martin Gruenberg. Verbal missteps could reignite concerns about government deposit backstops, but we suspect markets have grown considerably less prone to irrational overreaction on the issue. After recent official interventions, depositors will continue to seek better returns on their money – money market funds, offering substantially higher yields, should continue to drain funds from regional bank coffers – but are unlikely to worry as much about the return of their money.

In Canada, Finance Minister Chrystia Freeland will deliver the 2023/24 federal budget, with lower levels of fiscal stimulus expected after a massive surge in spending during the pandemic.Freeland has already telegraphed targeted inflation relief for households, along with more spending on health and climate areas, and – despite a long and disappointing record of success – industrial policy initiatives are likely to receive heavy billing as the country attempts to compete with similar moves south of the border. The impact on the Canadian dollar should be relatively minimal, with government debt loads remaining comparatively manageable (in contrast with the private sector), and any impact on growth expected to arrive far into the future, if at all. Hard decisions on improving Canada’s competitiveness – removing interprovincial trade barriers, streamlining securities regulation, cutting red tape in the homebuilding sector, improving educational outcomes for citizens and newcomers, lowering tax burdens – will remain unmade.

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Higher for (even) longer