NZD surges as US rate expectations tumble in wake of US banks collapse

Daily Currency Update

The New Zealand dollar was the best performer through trade on Monday, outpacing all other major counterparts as the fallout following the collapse of Silicon Valley Bank (SVB) continues to reverberate across financial markets. Despite the distinct risk-off environment, the NZD charged higher, buoyed by a steep correction in US rate expectations.

The collapse in US 2- and 10-year treasury yields and adjustment in longer-run rate prospects outweighed risk aversion, helping lift the NZD back above US$0.62 and toward intraday highs north of US$0.6260. Reports New York-based Signature Bank has followed SVB into receivership have elevated concerns of contagion and a run on the banks.

Despite officials’ efforts to contain fears and sure-up deposits, markets have sought to identify those institutions with similar exposures to SVB, selling stocks in those with the highest percentage of uninsured deposits.

Despite the persistent threat of inflation, markets have all but priced out any possibility of a Fed rate hike next week. In this environment, it is almost impossible for policymakers to lift rates. The narrative has flipped again with markets unwinding Fed rate expectations as financial conditions will likely tighten naturally as a result of SVB’s collapse as banks seek to attract depositors with higher interest rate returns.

Assuming fears of contagion ease and risk appetite is restored, there is a path for the NZD to climb steadily on the heels of a weaker dollar while a full-blown banking crisis will drive demand for haven assets, lifting demand for bonds and driving the USD higher.