Forex Focus: Bank crisis fears take a turn, dollar weakens, focus shifts to ECB

2023-03-16 16:54:33

Here's what investors need to watch on Thursday, March 16:

Sentiment appeared to have started to improve early Thursday, following Wednesday's furious flight amid renewed fears that Credit Suisse would collapse without additional financial support. The European Central Bank (ECB) is due to announce its policy decision later in the day, and February housing starts, building permits and the Philadelphia Fed manufacturing survey for March will be on the U.S. economic calendar.

Ammar Al Khudairy, chairman of the National Bank of Saudi Arabia, Credit Suisse's largest investor, said the panic surrounding Credit Suisse was unnecessary, Bloomberg reported earlier Thursday. Al Khudairy added that the regulator was ready to "fill holes as they arise", while noting that the bank was unlikely to need more capital. What's more, the Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority (FINMA) issued statements later on Wednesday saying that Credit Suisse complies with capital requirements for banks and that they will provide liquidity if necessary. After falling more than 3.5% on Wednesday, the Euro Stoxx 50 index was up more than 1% in pre-market trading. Separately, Credit Suisse shares were reported to have risen more than 20% at the open on the Swiss exchange.

"The concern with the Credit Suisse incident is whether this becomes a full-blown global banking problem, and it looks like central banks are really in a bind to tighten policy," said Bipan Rai, head of North American FX strategy at CIBC Capital Markets. to solve problems in the real economy, and of course, the spillover effect of that is the financial sector.”

Meanwhile, the U.S. dollar index, which rose more than 1% on Wednesday, is in a technical correction, trading in negative territory around 104.50. Fed funds futures, which reflect the overnight rate banks use to lend to each other, fell sharply. The December contract fell to 3.767 percent from about 5 percent a week ago, suggesting a potential rate cut in June.

The benchmark 10-year U.S. Treasury yield was up more than 1% on the day after falling sharply on Wednesday. The two-year Treasury yield fell 26.1 basis points to 3.964% on Wednesday, pausing further losses after falling to its lowest level since September 2022. Finally, US stock index futures edged up 0.40% during the European morning session, reversing the previous day's losses to around 3940 points.

"With regional banks playing a key role in U.S. credit expansion, and with the Fed not raising rates next week, we may have already seen short-term and long-term interest rate hikes over the course of the week," Torsten Slok, chief economist at Apollo Global Management, said in a note. Peak."

Based on futures pricing, there is a 60.1% chance the Fed will not raise rates at its March 21-22 policy meeting, according to CME's FedWatch tool.

EUR/USD

EUR/USD fell more than 150 pips on Wednesday and was within a hair's breadth of 1.0500 before staged a rebound.

EUR/USD retreated sharply after rising as high as 1.0750 on Thursday, and at press time, the pair was trading a few points above 1.0600, up 0.4% on the day.

Earlier, Credit Suisse's financial situation deteriorated, sparking some risk aversion. It was the first sign in Europe that any one bank is facing a liquidity crunch as borrowing costs rise. All eyes will be on the European Central Bank (ECB) interest rate decision.

On Wednesday, Reuters reported, citing a source, that policymakers at the European Central Bank (ECB) are leaning toward a 50 basis point (bps) rate hike on Thursday. "Despite the turmoil in the banking sector, policymakers expect inflation in the euro area to remain too high," the source said. At the same time, the source said the council did not want to be discouraged by abandoning a 50 basis-point rate hike，which harms its reputation.

Meanwhile, anonymous sources say Bank of America is less vulnerable to the Credit Suisse disaster. Also, emergency talks from the Bank of England (BoE) and market chatter suggesting no immediate negative reaction from the Federal Reserve (Fed) and the European Central Bank during their monetary policy meetings also appeared to be aimed at quelling previous risk aversion.

Looking ahead, the ECB's response to the Credit Suisse crisis will be in focus for EUR/USD traders as a 50 basis point rate hike from the central bank is a given. As such, ECB President Christine Lagarde's press conference will be even more important, and despite the rate hike announcement, could overwhelm the EUR/USD pair if questions are raised about future rate hikes and the state of the economy.

GBP/USD

GBP/USD fell towards 1.2000 during Wednesday's US trading session, but managed to erase some of the intraday losses by the end of the day. The pair remained relatively calm early on Thursday, attracting fresh longs around the 1.2040-1.2035 area and rebounding further from a one-week low near the psychological 1.20 mark hit the previous day. The spot price broke through the 1.2100 mark in the early European market to hit a new high of the day, and it seems to have ended the two-day losing streak.

A broad rally in equities pushed the safe-haven dollar lower and was a key factor pushing sterling higher against the dollar. A slight improvement in global risk sentiment came after embattled Credit Suisse announced it would exercise an option to borrow $54 billion from the Swiss National Bank to bolster liquidity. Separately, Ammar Al Khudairy, chairman of the Saudi National Bank, reportedly said that the panic surrounding Credit Suisse was unfounded and that regulators were ready to plug loopholes as they emerged.

However, the lackluster market reaction seems to suggest that investors remain concerned about a broader systemic crisis, especially after the collapse last week of Silicon Valley Bank and Signature, two mid-sized U.S. lenders. That could dampen any optimism, which, along with the prospect of further Fed tightening, should act as a tailwind for the greenback and limit gains for the GBP/USD pair.

By contrast, markets are now pricing in a 50% chance the Bank of England (BoE) will pause its rate hike cycle next week amid renewed turmoil in European banks. This, in turn, calls for caution before placing aggressive bullish bets around GBP/USD and positioning for further intraday appreciation.

Traders will now focus on the U.S. economy, including the usual weekly initial jobless claims, Philadelphia Fed manufacturing index, building permits and housing starts data. Beyond that, ECB-induced volatility could provide some impetus to the GBP/USD pair.

USD/JPY

USD/JPY closed in negative territory as the yen found demand as a safe haven despite broad dollar strength. In early Thursday trade, the pair remained weak, trading in a bearish zone around 133.00.

Despite the positive developments around Credit Suisse, fears of fresh turmoil in the global banking sector continue to drive safe-haven flows to the Japanese Yen (JPY) and weigh on USD/JPY.

Aside from that, modest weakness in the greenback is another headwind for USD/JPY, although the prospect of further Fed tightening helps limit losses. In contrast, the Bank of Japan (BoJ) is expected to stick to its dovish stance to support the fragile domestic economy. In fact, incoming BOJ Governor Kazuo Ueda recently emphasized the need to maintain ultra-accommodative policy settings, saying the central bank is not looking to quickly move away from a decade of massive easing.

Additionally, volatility inspired by the European Central Bank (ECB) could provide fresh impetus.

During the Asian session, data from Australia showed that Employment Change came in at +64.6K in February, beating market expectations of +48.5K. The unemployment rate fell from 3.7% to 3.5%, and the participation rate increased slightly from 66.5% to 66.6%. Other data showed that consumer inflation expectations fell to 5% in March from 5.1% in February. AUD/USD gained traction after these data and was last up 0.5% on the day around 0.6650.

USD/CHF rose 2.36% on Wednesday to close at 0.9328.

Spot gold took advantage of Wednesday's plunge in global bond yields, rising nearly 1%. Gold prices traded lower early Thursday, last trading below $1,920, amid a recovery in yields.

Bitcoin snapped a three-day winning streak, falling more than 1% on Wednesday. Bitcoin appeared to regain traction early Thursday and was last up 1.3 percent at $24,700. Ethereum fell nearly 3% on Wednesday, but managed to shake off the bearish pressure in the European morning to recover towards $1,700.

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