US Dollar should continue to consolidate – HSBC

SVB (Silicon Valley Bank) rattled the US financial sector and global markets last week. Economists at HSBC analyze investment implications.

USD downside to occur when the economic downturn is further advance

“In the short term, we expect continued volatility in US equities and credit and hence we stress our focus on quality. We think the backstop provided by the Fed for banks should be helpful to restore public confidence in the banking system. While tech VC may face more headwinds than before, we maintain a neutral view on IT and focus on established cash-generative industry leaders. As for financials, some banks may raise deposit rates, which could weigh on profitability but net interest margins are very healthy, causing us to keep a neutral view on the sector.”

“For fixed income investors, the increased level of uncertainty may direct the Fed to a 0.25% hike (as per our view) rather than 0.5% in March. The volatility and increased unemployment have moved the markets’ view of the peak rate from 5.69% to 5.1%, close to our 5.25%-5.5% forecast. We continue to overweight global investment grade and stay invested in senior and Basel III Tier 2 financials bonds.”

“The US Dollar should continue to consolidate. The fall in rate expectations weighed on USD last week, but on the other hand, the USD benefits from a safe haven bid. We expect further USD downside to occur when the economic downturn is further advanced and global risk appetite bounces.”