Share:

Fears of systemic risk in the banking sector

Lately, fears of systemic risks in the banking sector has been the most prominent and important market theme. The collapse of the regional US Silicon Valley Bank (SVB) on 10 March triggered stress in markets with yields plummeting and volatility spiking. As a result, the Fed promptly set up an emergency program to avoid contagion to the broader US financial system. Nonetheless, concerns have still spread to European banks with most recently the Credit Suisse Group coming under pressure leading to an acquisition by the UBS. European bank stocks have heavily underperformed benchmark indices. Despite a broad repricing lower of major central banks' rate outlooks, the ECB stood its course raising all policy rates by 50bp at the March meeting. Overall, recent events highlight the rising trade-off facing central banks amid the need for a contractionary policy to bring inflation down and the risk of breaking something systemically important.

We are cautiously optimistic on subsiding systemic risk fears

Rising systemic risk fears have unsurprisingly led to higher FX volatility. In majors space, JPY and GBP have benefited while cyclical sensitive currencies have faced headwinds. USD has fluctuated wildly in tandem with US specific news, risk appetite and relative rates moves. After a temporary February rebound, both SEK and NOK have come under renewed pressure. Lower energy prices have market a hit to the notoriously risk appetite sensitive NOK but also SEK has suffered in recent weeks despite the Riksbank's renewed focus on imported inflation and hence currency weakness. Also the growth outlook and housing markets remain SEK headwinds.

In our base case, we are cautiously optimistic on systemic risk fears subsiding although we acknowledge that the outcome space is very wide. We maintain our strategic case for a lower EUR/USD and thus keep our downward sloping profile forecasting EUR/USD at 1.02 in 6-12M. We continue to expect the SEK to struggle over the medium-term horizon on the back of a relatively worse outlook for the Swedish economy compared to peers, valuation as well as an increased risk of overtightening by the Riksbank. In NOK, we acknowledge that the near-term prospects for NOK look more challenging than previously pencilled in and lift the short-end of our forecast profile, but keep the downward trajectory.

At present, the key risk is a more widespread crisis in the banking sector, which would create substantial downward pressure on inflation and growth prospects. A key assumption behind our FX forecasts is that of a stronger USD and tightening of global financial conditions. Risks to this assumption primarily lies in Fed delivering an actual policy pivot - possibly due to systemic risk fears or a weaker US economy than we expect.

Download The Full Marker Guide

Share: Feed news

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Follow us on Telegram

Stay updated of all the news

Join Telegram

Recommended Content


Follow us on Telegram

Stay updated of all the news

Join Telegram

Recommended Content

Editors’ Picks

EUR/USD recaptures 1.0700 ahead of key US data

EUR/USD recaptures 1.0700 ahead of key US data

EUR/USD is trading above 1.0700, staging a decent recovery despite soft inflation data from the Euro area. The Euro buyers cheer hawkish ECB commentary while the risk-positive market environment limits the USD's upside ahead of key US data. 

EUR/USD News

GBP/USD rises above 1.2450 as risk flows dominate

GBP/USD rises above 1.2450 as risk flows dominate

GBP/USD is recovering above 1.2450 in the European session, as the US Dollar resumes its downside amid a risk-on market mood. Renewed dovish Fed expectations and US debt deal passage keep the US Dollar undermined ahead of the US ADP jobs and ISM Manufacturing PMI data. 

GBP/USD News

Gold price rebounds toward $1,970 amid renewed US Dollar selling

Gold price rebounds toward $1,970 amid renewed US Dollar selling

Gold price is rebounding toward $1,970, having found strong bids near $1,950. The risk-on market profile is weighing on the US Dollar, enabling Gold price to attempt a recovery. The further upside, however, appears elusive amid rallying US Treasury bond yields. US data awaited. 

Gold News

Bitcoin likely to remain in red through the next quarter if history is any indication

Bitcoin likely to remain in red through the next quarter if history is any indication

Bitcoin (BTC) price produced a monthly close at $27,210, noting a -6.92% return for May. The last-minute slide in BTC put an end to the four-month bullish streak that kickstarted the 2023 rally. 

Read more

C3.ai gets punched in the face, is the AI hype a bit overdone?

C3.ai gets punched in the face, is the AI hype a bit overdone?

OMG! Stocks sold off on Wednesday….and NVDA?  That stock gave back $15 or 3.8% - What is going on? That is not supposed to happen….it can only go up! Quick someone call the NVDA police! 

Read more

Majors

Cryptocurrencies

Signatures