Calendar Week 12-2023

 

More bank runs as we get to hear from the US Fed this week. Cash deposits in US banks headed out the door in droves as Treasury tried to shore up the banks with bailout funds and larger banks lent cash to the smaller banks. Even the massive European bank of Credit Suisse got squeezed too, which was the scariest news last week.

 

Issue has been, that banks have used client funds to generate a return that they can pay clients interest on their cash deposits by buying long dated bonds. This is usually a safe haven, however, as the US Fed jacked up rates rather quickly. Those bonds have decreased in value, generating a loss on bank balance sheets. This loss is crystalized when depositors ask for their cash back and the banks have to sell their bonds at a loss to generate the cash to refund clients.

 

So where will bonds go now then? This week the FOMC will give us a guide. However the market now expects one more rise of 0.25% this week and that is it. From there, it is tipped to be 0.75% lower at ear end.

 

Where will inflation be if that is the case? Will the battle to reduce inflation be lost in the attempt to save the US banks?

 

This peak (or terminal rate) in interest rates will give some relief to the banks. Will it be in time though, that is the unknown right now as panic is contagious and can spread wider and longer than one would usually expect.

 

Following that, is the looming recession that the higher rates will force the globally economy into. We are seeing that play out in commodity prices as the expected slowdown in global growth sends oil and copper prices lower.

 

For this week will see heightened volatility as investors look for the safety of gold and sovereign bonds. I expect Australian and New Zealand bonds to also do well as a safe haven, considering the sound structure of our banking system.

 

Fun times.

 

Currency Guidance

 

USD – From a technical view, the uptrend is broken. But I do not see a downtrend established just yet. Fundamentally it is tough to see too, I suspect this week will be very choppy as the flight out of US dollars is offset with the safe haven flow into US Treasuries.

 

AUD – Still in a downtrend and 0.67 proving a tough ceiling for the Aussie. As mentioned above, there could be inflows to AUD as a safe haven, and that would be the only reason to buy it. Interest rate differential we are well behind others and with global growth shrinking the value of commodities, the outlook for Australia does not warrant our currency to be any higher than it is.

 

EUR – Smashed on Credit Suisse, and rightly so, but then rallied on the bail out. Expect more froth this week too. Just cannot see a direction here.

 

GBP – Similar to Australia, the Gilts (which are 0.4% higher than Australia) will benefit from the US exodus, and maybe more so. Technically it is ranging between 1.19 and 1.24, and it seems to be heading back across that now.

 

JPY – The BOJ will be concerned with the strength of the Yen now. They have long held that they need a weaker currency and are active in pursing that end. But the market forces are stronger as protection is the order of the day. Last week I suggested trading the Yen against weaker currencies. I stand by that this week too.