17.03.2023 – The European Central Bank (ECB) has raised its key interest rate once again. But the market currently cares rather little. Because even among forex traders, the back and forth in the banking crisis is currently the number one topic.
Yesterday was the day: The ECB raised the key interest rate for the euro area again by 50 basis points to 3.5 percent. Since last July, the central bank has thus increased by 350 basis points in six steps. The reason is rampant inflation: According to an estimate by the European statistics authority Eurostat, inflation was 8.5 percent in February. Yet monetary policy is currently just the accompaniment in Financial Crisis 2.0. The ECB stressed, “The euro area banking sector is resilient: capital and liquidity positions are sound.” Well then….
Source: Bernstein Bank GmbH
You can see how much nervousness in the banking market affects the exchange rate in the four-hour chart of EURUSD. Silicon Valley Bank, Signature Bank and especially Credit Suisse caused wild ups and downs. Flight into safe US government bonds versus new risk appetite and short recovery in European stock markets. You can take your pick after which headline the forex pros switched positions. In any case, the vola brings some opportunities for savvy traders.
Tension at the banks
It looks like the situation in the US has eased recently. Or has it? Yesterday, the largest U.S. banks decided to bail out the next teetering regional institution, First Republic Bank. Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, BNY-Mellon, PNC Bank, State Street, Truist and U.S. Bank want to raise a total of 30 billion dollars. The question now is whether, with an easing in the current U.S. banking crisis, the Fed will not continue its tightening, which would strengthen the dollar.
Bigger credit crunch than in 2008
However, there seems to have been quite a bank run recently at many U.S. banks, the institutions need fresh money; which speaks against higher interest rates. The “Frankfurter Allgemeine Zeitung” took a look at the Fed’s emergency measures: “Data published by the U.S. Federal Reserve showed borrowing of $152.85 billion through the discount window, the traditional liquidity reserve for banks, for the week ending March 15. The record figure compares with a volume of $4.58 billion in the previous week. The previous all-time high from the 2008 financial crisis was $111 billion.”
So does the Fed need to take a pause in tightening? The dilemma here is that if the Fed admits this, the market could interpret it as a panic signal – how bad is the situation really
Our conclusion: The most important question for forex traders at the moment is whether more commercial banks will wobble. If larger, systemically important addresses topple, investors around the world are likely to move their money to safety in U.S. bonds. Which should strengthen the dollar. However, it would then be difficult for the Fed to raise interest rates; it would probably even have to respond with a new quantitative easing. If things settle down, money will flow out of U.S. bonds back into equities around the world, which should tend to weaken the greenback. So keep an eye on the real-time news – Bernstein Bank wishes you successful trades and investments!
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