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Dollar slipped on Friday after banks moved to ease stress

Reuters: The dollar slipped on Friday as risk sentiment improved after authorities and banks moved to ease stress on the financial system in major markets, taking heat off other major currencies that tumbled earlier in the week in the wake of bank turmoil.

US Dollar slipped on Friday

Large U.S. banks on Thursday injected $30 billion in deposits into First Republic Bank, swooping in to rescue the lender, which was caught up in a widening crisis triggered by the collapse of two other mid-size U.S. banks over the past week. Cautious calm spread across markets on Friday, giving room for rises in risk-sensitive currencies like the Australian and New Zealand dollars, which were among the largest gainers in Asia trade. The Aussie rose 0.4% to $0.6684, while the kiwi edged 0.3% higher to $0.62145. The $30 billion rescue package, put together by top power brokers from the U.S. Treasury, Federal Reserve and banks, followed Credit Suisse’s announcement earlier on Thursday that it would borrow up to $54 billion from the Swiss National Bank. It had similarly become embroiled in widespread contagion following the implosion of U.S.-based Silicon Valley Bank (SVB).

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But even as a 30% plunge in the embattled Swiss lender’s shares stoked fears about the health of Europe’s banks, the European Central Bank (ECB) nonetheless went ahead with a hefty 50-basis-point rate hike at its policy meeting on Thursday. ECB policymakers sought to reassure investors that euro zone banks were resilient and that if anything, the move to higher rates should bolster their margins. The euro’s reaction to the decision was fairly muted, though it managed to eke out a 0.3% gain on Thursday. It was last 0.14% higher at $1.0625. “The euro zone banking sector remains in reasonably solid shape,” said Wells Fargo international economist Nick Bennenbroek. “Should market strains ease and volatility recede in the weeks and months ahead, persistent inflation should in our view be enough to elicit further (ECB) tightening.”

Elsewhere, sterling rose 0.15% to $1.2128, while the Swiss franc gained 0.1%. Earlier in the week, the Swissie had plunged the most against the dollar in a day since 2015. The Japanese yen remained elevated, and was last roughly 0.3% higher at 133.30 per dollar. Fragile market sentiment had traders flocking to the yen – typically considered a safer bet in times of turmoil – on mounting worries that the recent stress unfolding across banks in the U.S. and Europe could be just an early stage of a widespread systemic crisis. “The market gyrations of the past week are not rooted in a banking crisis, in our view, but rather are evidence of financial cracks resulting from the fastest interest rate hike campaigns since the early 1980s,” said analysts at BlackRock Investment Institute. “Markets have woken up to the damage caused by that approach – a recession foretold – and are starting to price it in.”

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The Federal Reserve’s monetary policy meeting next week now moves to centre stage. Some investors are hoping that the Fed could slow down on its aggressive rate-hike campaign in a bid to ease the stress on the financial sector. “The turmoil in the banking sector is complicating the outlook for Fed policy, but the impact may be more nuanced than the Fed simply reversing course,” said Philip Marey, senior U.S. strategist at Rabobank. The U.S. dollar index slipped 0.12% to 104.27.

British Pound

Reuters: The pound eased on Thursday, losing out to the euro ahead of the European Central Bank’s policy decision later in the day, but held steady against the dollar, as a degree of calm returned to global markets. Sterling was last down just 0.1% against the dollar at $1.2048, easing for a third day in a row, while against the euro it sank 0.4% to 88.06 pence. A little more stability crept into markets after Credit Suisse said it would use a $54-billion lifeline from the Swiss National Bank to shore up liquidity and restore investor confidence that has taken a bashing this week as problems at Switzerland’s second-biggest bank have mounted. The pound drew little comfort from Jeremy Hunt’s spring budget the day before, in which the UK finance minister said the economy would avoid recession this year. “The chancellor’s budget statement yesterday was overshadowed by the focus on European banks but the pound’s undertone is typically not determined by the government’s fiscal policy anyway,” Scotiabank chief FX strategist Shaun Osborne said.

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“The statement ticked most of the expected boxes but whether Hunt’s plans can lift UK growth as he intends remains to be seen. What is clear from the numbers is that the UK’s overall fiscal position remains weak and there is little margin for the government to negotiate unexpected developments,” he said. The broader market turmoil induced by the failure of three U.S. lenders in the last week has been compounded by the issues at Credit Suisse and muddied the outlook for monetary policy. Traders had already attached a strong chance the Bank of England (BoE) would leave UK rates unchanged when it meets next week, with the possibility of a rise of just 25 basis points (bps). That probability is now split 50/50, according to Refinitiv data. “Sterling markets will continue to digest yesterday’s Budget delivered by Chancellor Jeremy Hunt as well as the broader global environment. Markets remain ambivalent whether the Bank of England will raise interest rates next week,” said Hann-Ju Ho, senior Economist, Commercial Banking at Lloyds Bank.

The European Central Bank (ECB), meanwhile, is a little behind the BoE in its quest to fight inflation. Traders attach a 60% chance of the ECB raising rates by 50 bps on Thursday, with a 40% chance of 25 bps. Money markets show investors expect ECB rates to peak around 3% later this year, compared with a peak of 4% just over a week ago. The BoE, meanwhile, could well leave rates where they are at 4%, compared with expectations last week for a peak of closer to 4.8%. With so much investor anxiety centred on the health of banks right now, in addition to a steer on the rate outlook, ECB President Christine Lagarde could be under pressure to signal what the central bank is prepared to do to offer support. “If the early morning rally reverses, or the markets take fright post-ECB, it’s possible that we may get a joint statement from the world’s major central banks later in the day stressing their commitment to being a lender of last resort and maintaining global liquidity through FX swap lines,” Capital Economics said in a note.

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South African Rand

Reuters: South Africa’s rand bounced on Thursday as the dollar eased and some calm was restored in markets after an emergency lifeline for embattled lender Credit Suisse by Swiss authorities, ahead of a key European Central Bank (ECB) meeting later in the day. South Africa’s rand firmed 0.7%, after falling 1.6% as a slump in the shares of Credit Suisse coming just days after the sudden collapse of Silicon Valley Bank in the United States intensified fears of a global banking crisis. But Credit Suisse said it would borrow up to $54 billion from the Swiss central bank to shore up liquidity, which helped bring back some confidence in global financial markets.

The broader emerging markets currencies index was flat, with Asian units trading mixed as market sentiment overall remained fragile.”Expecting another nervous day in FX markets,” said Francesco Pesole, FX strategist at ING. “The question now is whether investors will be happier that CS has access to liquidity or will continue to focus on the CS business model and the trend in capital levels.” The Russian rouble fell towards its weakest mark against the dollar in almost 11 months, dragged down by sharply lower oil prices. Wild swings in commodity prices have also affected developing world assets. Emerging market stocks dipped around 0.7%, as heavyweights Hong Kong and China failed to join the broader rally in markets.

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All eyes were on the ECB meeting later in the day for the first big test of how policymakers will respond to growing fears about banks. The ECB is seen raising rates by another hefty 50 basis points. Most central and eastern European currencies were mixed, with Hungary’s forint reversing early gains to trade slightly lower against the euro, while the Czech crown edged higher. Polish central banker Ludwik Kotecki said conditions will not be right for cutting interest rates until the end of 2025. The zloty was flat. The Ugandan shilling dipped slightly on the back of continuing elevated demand for hard currency from players in the interbank market, traders said. Spreads on the JPMorgan EMBI Global Diversified index widened further to mark a fresh four-month high standing at 499 bps.

World Markets

Reuters: Asian markets extended a risk rally on Wall Street on Friday to end a tumultuous week that saw a brewing banking crisis send bond yields plunging while market participants sharply lowered expectations of future interest rate hikes in Western economies. Overnight, the European Central Bank (ECB) delivered an inflation-fighting 50 basis point rate hike in line with oft-repeated guidance, with sentiment buttressed by the Swiss National Bank’s massive support for Credit Suisse Group AG, which sent the troubled lender’s shares 20% higher. Further helping sentiment, as many as 11 U.S. banks including JPMorgan Chase & Co will deposit as much as $30 billion into First Republic Bank. Investors welcomed the move by sending the stricken lender’s stock 10% higher. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.9% on Friday, erasing earlier losses this week. Japan’s Nikkei climbed 0.5%. China’s bluechips increased 0.8% and Hong Kong’s Hang Seng Index surged 1.2%.

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S&P 500 futures eased 0.1% and Nasdaq futures were flat after major U.S. stock indices rallied hard on easing fear of a global banking crisis. Meanwhile, global central bankers on Thursday introduced what market watchers interpreted as an emerging effort to firewall the rate increases needed to fight inflation from separate efforts to calm concern about financial stability. “The ECB is trying to draw clear lines between its inflation fight and its job of maintaining financial stability. This is a theme other central banks are likely to echo,” said James Rossiter, head of global macro strategy at TD Securities. “It is rare that financial turmoil emerges in such a high-inflation environment, and while tighter financial conditions come at a convenient time for inflation-fighting central banks, they are unlikely to believe that tighter financial conditions alone will be enough to return inflation to target.” After hiking as indicated, the ECB refrained from providing a forward guidance on future rate hikes. Euribor futures have fully priced in a quarter-point hike to 3.25% at the ECB’s next policy meeting and the possibility of another.

Markets are also back to overwhelmingly pricing in another 25 basis point hike from the U.S. Federal Reserve at its meeting next week, though there is a 20% chance of the Fed pausing instead. Two-year Treasury yields continued to climb on Friday, rising 8 basis points to 4.2137% and pulling away from a six-month low of 3.7200% touched earlier this week. Yields were, however, headed for the steepest weekly decline since February 2020 when markets were thrown into chaos by COVID-19 fear. Ten-year yields were steady at 3.5789% on Friday and were set for a weekly decline of 11 basis points. The U.S. dollar and Japanese yen reversed some of their safe-harbour flows. The dollar index hovered at 104.38, after easing 0.3% overnight, while the yen pulled back from a one-month high to 133.47 per dollar. The euro steadied at $1.0615, after having received a boost from the ECB’s half-point hike overnight. “The past week has provided an unwelcome reminder of the inherent fragility of banking systems,” said analysts at Capital Economics in a note to client.

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“There is still a great deal of uncertainty. The key question is whether this episode proves another relatively brief period of volatility that soon dies down, or the first tremors of a major banking crisis. At this stage, the answer is unknowable.” Underscoring the scale of stress in the financial system, data showed that banks sought record amounts of emergency liquidity from the Federal Reserve over recent days, smashing the prior record set during the global financial crisis. Oil prices slipped on Friday but were headed for a 10% fall for the week. U.S. crude eased 0.3% at $68.15 a barrel, while Brent crude also skidded 0.3% at $74.5 per barrel. Gold was slightly higher. Spot gold was traded at $1920.69 per ounce, heading for a weekly gain of 2.8%.

Published by the Mercury Team on 17 March 2023

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