David and Goliath
Yesterday’s FX market was characterised by heavy Euro weakness and a surging US Dollar. The only discussion taking place in the market yesterday, aside from a minor distraction in the form of Jeremy Hunt’s budget, was Credit Suisse. So, can the Goliath of the US Dollar really be undermined by a single Swiss stock? The answer as we saw yesterday was a resounding although likely short lived yes. Following disturbances in the US banking sector last week with the collapse of Silicon Valley Bank and the forced closure of other US banks, markets were on edge to see if contagion would spread through the sector. Each time a single banking stock had taken a hit, including before the forced sales of SVB, stock prices in the wider banking sector globally had tended to fall.
Investors were both bracing themselves for any potential systemic risk that might either be shared by the sector as a whole or even created by the singularities happening elsewhere in the market. Yesterday, confirmation that one of Credit Suisse’s biggest shareholders would not (and could not for regulatory purposes) inject more capital into the bank sent shares tumbling. Overnight the lender secured confirmation from the Swiss National Bank that it could tap into up to $54bn of reserve cash. Given the havoc brought yesterday to its stock and bonds, it also offered to repurchase a significant amount of debt to stem the erosion of value behind its direct instruments.
The reaction in the US Dollar yesterday reflected a flight to safety from investors. Reminders of events still all too familiar from the 2007/8 era led to defensive market conditions with strong defensive bids into the Dollar and other safehaven currencies. Credit Suisse’s woes exposed yesterday could have been read as the prelude to a wider European banking crisis, allowing the Euro to also lose value. The Euro was particularly sensitive ahead of a much awaited 50-basis point hike from the ECB that had, until recently, been expected to be delivered today. All eyes will be on the ECB today whether the concerns surrounding the banking sector prompt them to recast their seemingly set in stone overside hike. Whilst the knock-on effects of undermining expected interest rate hikes may endure leaving lasting impacts on currencies, the truth is Credit Suisse has been in investors’ crosshairs for a long time and there is no sign of a wider banking crisis in Europe at this time.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Daily Brief – Two tales of a weaker Dollar
Charles Porter
Thu 5 Sep 2024
Two tales of a weaker Dollar As the week that should decide the fortune of the US Dollar continues to unfold, this brief looks at the two very different legacies of a weaker Dollar. For emerging markets-EM and other high beta currency classes, a weaker Dollar can both act as a tail wind and a […]
Daily Brief – Not just about rates
Charles Porter
Tue 10 Sep 2024
The focus of next week’s Bank of England-BoE decision will not just be about benchmark interest rates. At a time when central bank meetings are most often scrutinised for clues regarding the outlook for domestic interest rates, this particular BoE meeting will have an important distraction. The next monetary policy decision is due next Thursday. […]
Daily Brief – Enough Labour Already!
Charles Porter
Tue 3 Sep 2024
Enough Labour Already! And no, I’m not talking about UK politics here. Despite the new UK government attracting significant attention in markets and the press ahead of the awaited/feared Autumn budget, this briefing is about the labour market. This week holds in store a plethora of US labour market data which is likely the biggest […]
