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Hi everyone! It’s me, Kate Stikhina You are watching a recap of the Asian session. Japanese stocks dropped to a 7- week low in the morning. China’s stock market saw a big sell-off as well.
Equities in Australia and New Zealand nosedived following a slump on Wall Street. What exactly undermined sentiment in stock markets? How did it impact the main currencies? Let’s discuss it!
Asian stock markets tumbled due to the continuing turmoil in the banking sector. After the collapse of three US banks, Credit Suisse faced the same fate. Once a symbol of Swiss reliability, it was unable to weather the storm. Its shares plunged by 31% yesterday. Stock trading of several European banks was stopped.
So, jitters about the stability of the global financial system rose again. However, this time, they have intensified significantly. The reason for the demise of banks is not associated only with poor management. To mitigate the coronavirus crisis, central banks pumped markets with liquidity. However, when inflation started to accelerate, they began to raise rates. Even the most reputable banks failed to adapt to such rapidly changing conditions.
In many countries, including the United States, banks are required to buy a certain share of government bonds. They usually depreciate when the regulator hikes the key rate. Banks lose their own investments. In case of a lack of liquidity, they begin to sell them, facing big losses.
That is why the US government intervened quickly following the collapse of Silvergate Bank, Signature, and Silicon Valley Bank. The Treasury Department and the Fed acted promptly to calm down depositors and prevent other bank runs. Many banks may not be able to stay afloat due to the liquidity crisis.
The Fed is well aware of the dangers its further hawkish policy may inflict. That is why some traders believe that the regulator could take a pause. Other central banks may switch to a less aggressive approach to avoid a severe recession.
The Fed funds futures are changing drastically. Yesterday, markets priced in only an 18% chance that the Fed would not raise the rate on March 21-22. Today, as the FedWatch Tool shows, the figure has already exceeded 30%.
Woes in the banking sector adversely affected Forex as well. Given the growing uncertainty, investors have to choose from unfavorable options. The US dollar has always been a safe-haven asset. Yet, its reputation as a strong currency has been somewhat shattered by the crisis of several banks, including Silicon Valley Bank. This is the 14th largest bank in the country.
Recession risks are still acute in the US. Will central banks be able to stick to a hawkish stance? Now, almost all regulators are caught between a rock and a hard place. Inflation is still high and rates need to be raised to curb it. However, further tightening could lead to new bank runs and an economic downturn.
Naturally, the US dollar looks stronger amid a resilient economy compared to its rivals. Nevertheless, it failed to climb. In the Asian session, it was moving in the downward range of 104.3-104.7. It remained rather volatile.
Amid a lack of liquidity in the US banking and financial sectors, demand for the US dollar is falling. Government bonds tumbled too. The yen is taking advantage of the situation. It is trying really hard to restore its status as a safe haven currency.
Japanese businesses abroad are likely to get rid of the greenback, the euro, and the pound sterling and keep their profit in the national currency. There are two weeks left until the end of the fiscal year. During this time, capital inflows in the yen are sure to increase significantly.
The yen may maintain a bullish bias until the Fed's rate decision on March 22. Early Thursday, the dollar/yen pair hit 133.1. It was trading in the bearish channel of 132.5-133.5.
What is more, the yen appreciated amid upbeat domestic economic data. In Japan, machinery orders grew by 9.5% versus the forecast reading of 1.8%.
In February, Japan's trade deficit narrowed significantly to 897.7 billion yen from 3,498.6 billion. The country's economy is recoveringб spurring demand for the yen.
00:30 The situation in the Asian stock market
01:33 US Banking Situation
02:21 CME FedWatch on the FOMC rate
05:14 Japan Trade Balance
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Calendar and reviews
Trader’s calendar on June 8 - 9: USD to continue its rally?
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Trader’s calendar on June 1 - 2: Excessive market optimism in Europe?
Trader’s calendar on May 29-31: Analysts provide gloomy forecasts for China.
Trader’s calendar on May 25 - 26: USD to post gains?
Trader’s calendar on May 22 - 24: USD to remain strong?
Escolha do Editor
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Trader’s calendar on June 8 - 9: USD to continue its rally?
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