Massive revaluations in the interest rate market

The collapse of the SVB has turned upside down future interest rate expectations for the world's major currencies. So far, since October, we have been able to observe a strong correction in the dollar's valuation, after the chances of rate hikes in the US had been decreasing before February, while in the euro zone they were increasing, while in Australia and New Zealand they remained unchanged, so they were relatively high.

Only a series of events from the United States helped to strengthen the USD after the successively incoming data began to show the strength of the US economy. Both the labor market, the services sector and prices indicated that the Fed had to tighten monetary policy even more, which boosted expectations for a 50 basis point hike in March and could support the USD's strength. These expectations have now turned 180 degrees.

How can this affect exchange rates?

The collapse of the SVB meant that investors in the interest rate market again began to count on a rather dovish attitude Fed. Earlier, at the beginning of the year, there was a situation where the market counted on the dovish Fed, and the Fed sounded hawkish. Currently, the Fed cannot comment because before the March 22 decision, members FOMC they must be silent. The question is, is the market wrong again, hoping for a dovish stance from the Fed? We'll find out in a week.

Meanwhile, expectations about the actions of other major central banks outnumber the Federal Reserve. In the euro area, the market expects interest rates to be 0,5 percentage point higher next year, while in the US they are to be lower by -0,75 pp. The situation on the yen market is also interesting. Here, the market assumes an increase in rates by about 0,2 pp, which gives a total difference in rate changes of 100 basis points over a year in favor of JPY.

In other words, of the world's major currencies and central banks, the US is expected to make the largest cuts over the year -0,75 pp, followed by Canada with an expected cut of -0,5 pp, and for GBP, AUD, JPY or EUR, rates are expected to be higher, led by the euro and an increase of at least 50 basis points.

In theory, the greater the chances of a rate cut, as long as the Fed speaks in the same tone, the greater the chances of USD weakness and the strength of other currencies. Expectations for the Fed's actions are very mixed. Some institutions say that the liquidity crisis in the banking sector has been resolved and that it is possible to continue raising rates without obstacles, while others point to the Fed pausing in increases, waiting for the dust to settle and further tightening of monetary policy, while, for example, Nomura it even assumes a 25 bp cut in interest rates and the end of QT.

The whole of events can be summed up as never before in recent history has so much happened between Fed meetings, and in times of greatest uncertainty, FOMC members must remain silent. Next week, the Fed meeting will be held, which can already be called the meeting of the year.