Bannockburn Global Forex March 1, 2023 View Online Economic Calendar March 2: Tokyo January CPI, Eurozone Preliminary CPI March 5: China National People’s Congress begins March 6: Australia Reserve Bank March 8: Canada central bank, Poland central bank, China CPI March 9: Mexico CPI March 10: Japan central bank, US and Canada employment March 14: UK employment, US CPI, OPEC monthly report, March 15: China one-year medium-term lending rate, Australia employment, UK budget, March 16: European Central Bank March 20: China loan prime rate March 21: Canada CPI March 22: UK CPI, US Federal Reserve, Brazil’s central bank March 23: Japan CPI, Bank of England, Swiss National Bank, Norway’s central bank, European Council meeting March 24: Preliminary PMI March 30: China PMI, Mexico central bank, March 31: Eurozone preliminary CPI March 2023 Price pressures remain elevated, and labor markets are strong, giving most policymakers in the G10 the incentive to continue raising interest interests. There are two exceptions: Japan, the only country still with a negative policy rate (-0.10%), and Canada, where the central bank has indicated it would pause. While half-point hikes or larger were common in the second half of last year, the major central banks have slowed or will slow the pace to quarter-point moves as the endgame is in sight in either late Q2 or early Q3. The European Central Bank stands out as the exception, which has pre-committed to a 50 bp at its March meeting, even before the staff provides new forecasts. It may also be early to rule out a 50 bp hike at the early May meeting. Four developments in February helped shape the business and investment climate. First was the string of robust US economic data that saw market expectations converge with the Fed's more hawkish outlook. This was reflected in a sharp backing up of US interest rates, with spillover effects and recovery in the US dollar after falling for 3-4 months. Second, strong data and elevated prices spurred speculation that the terminal rate for European Central Bank is also higher than previously anticipated. The swaps market is pricing in the risk of a 4% terminal rate, up from 3.50% at the start of the year. Third, higher-than-expected Japanese inflation and a surprise choice for Bank of Japan Governor Kuroda's successor kept expectations running high for an exit from Japan's extraordinary monetary policy. However, these faded as the nominee endorsed the current policy settings. Fourth, the optimism over the re-opening of China post-Covid was tempered. Flows into Chinese stocks slowed, and the yuan unwound January's gains. Click here for further currency analysis In February, Bannockburn's World Currency Index, a GDP-weighted basket of the top dozen economies, fell 2.1% to snap a three-month rally. All the foreign currencies in the basket fell but the Mexican peso. All the major currencies fell by more than 1.5%. Sterling was the best performer, and the yen was the worst. Among the emerging market currencies in the index, the South Korean won rivaled the Russian rouble as the worst performer. We had anticipated the BWCI to return to January lows, but it fell further to reach its lowest level since early December, as the foreign currencies pared gains scored over in the October-January period. We suspect the bulk of the pullback is behind it and look for a modest recovery in March, driven by weaker US economic data and a new peak in the anticipated terminal rate for Fed funds. March may be a consolidative phase.