Forex » US Dollar Rebounds While US Treasury Bonds Fall
Streams of risk aversion are emerging along with the strengthening of the US dollar in the foreign exchange market, even despite lower US rates due to ongoing concerns about global banks. But this time, the anxiety comes from Europe.
Last Thursday, the world was shocked when news of problems at Silicon Valley Bank began to spread through the markets. While a major US bank under pressure is remarkable in itself, it was the potential impact that really began to worry, as the problems plaguing SVB could logically be extrapolated to other regional banks. And the markets are often unwilling to wait, because the slightest sign of trouble can lead to new changes in the behavior of investors and stock market savers, which can put even more pressure on the bank.
The weekend announcement of collateral deposits by both SVB and Signature Bank was intended to reassure, as was the President’s address on Monday. And it worked for a short while, but the same extrapolation that penalized banking stocks last Thursday is still lurking in the margins, and it’s starting to surface in Europe this morning as Credit Suisse came under pressure again following comments from one of the biggest investors. jar.
Years of low negative rates created vulnerabilities in banks’ investment portfolios as higher rates took the world by storm. And tomorrow the ECB will decide on interest rates, according to which rates should rise again, and with inflation of 8.6% last month and 8.5% in the preliminary measurement this month, it does not look like the European Central Bank is anywhere near with a dot. where they can avoid higher prices without risking even higher inflation (and bigger problems down the road).
US dollar leak
The US Dollar (DXY) is recovering in forex and the daily chart is currently showing an incomplete morning star formation that is often followed with bullish reversal targets. The support point that held yesterday’s lows, helping to build the doji, was at the familiar 103.45, with the next resistance near the 105.00 handle.
Dollar Index Daily Chart (DXY)
Source: StoneX, Tradingview
US rates fall on risk aversion fears
When concerns rise, investors may shun capital returns in favor of capital returns, which could mean abandoning high-yield investments in favor of those who consider themselves safer. This usually indicates an influx of funds into US Treasury bonds, and US Treasury bond prices rose sharply this morning, while yields fell after yesterday’s bounce.
The two-year rate yield fell to a new six-month low this morning, completely erasing yesterday’s rally that began as hopes began to seep that the banking saga may have been adequately resolved.
2-year US Treasury yield
Source: StoneX, Tradingview
EUR/USD in the spotlight ahead of tomorrow’s ECB meeting
Inflation remains problematic in Europe, with a reading of 8.6% last month and a provisional reading this month following at 8.5%. We will have a final reading of this data point on Friday; but before we get to that, we have the European Central Bank’s interest rate decision on the economic calendar for tomorrow.
The ECB was expected to raise rates by 50 basis points at this meeting to deal with inflation. But now that problems are arising in European banks, the question is whether they will arise, and if they do, there are fears about what could happen next.
Higher rates lower the value of bond and fixed income portfolios, which can create capitalization problems at these banks as they incur unrealized floating losses due to the rapid movement of higher rates after years of low and negative rates. Add to that bank runs with depositors withdrawing their capital (which removes more collateral from those wallets) and you have a recipe for disaster.
How could the ECB handle this scenario? We’ll have to wait to find out, but in response, the euro fell sharply in forex ahead of this rate meeting and is currently above a key support zone around 1.0500. This is the same area that came into play in the first week of the New Year, helping to hold the lows leading to an extension of the up move to 1.1033.
If sellers can break the price below this support zone, another level with longer-term interest near the 1.0350 level will emerge.
EUR/USD daily chart
Source: StoneX, Tradingview
The strength of the yen in forex
I spoke about this on Monday and again in yesterday’s webinar, highlighting the potential for forex yen strength in lower rate scenarios.
As USD/JPY began to rise through most of 2021 and the first nine months of 2022, carry trading was the driving force as higher US rates and low Japanese rates kept the pair strong. But just as the price picture began to change, the USD/JPY did the same in mid-October last year, leading to a 50% retracement in about three months of a trend that set 21 months to form.
The pair rebounded from the 50% mark of this move in mid-January, which continued last month, when the Bank of Japan began to move into new management in favor of a new governor who is expected to support the bank’s yield curve control policy.
But as U.S. rates began to fall, the carry’s appeal increased, leading to an unraveling that marks USD/JPY as one of the few majors reflecting the weakness of the U.S. dollar that day. Price is testing below the 38.2% retracement of the same Fibonacci retracement that helped find the January low, and a close below this level indicates 131.58 and 130.40 as the next support points on the USD/JPY chart.
USD/JPY weekly chart
Source: StoneX, Tradingview
James Stanley, Strategist, FOREX.com » Official site
James Stanley is a New York-based strategist and writer with over 23 years of market experience. James began trading stocks during the tech boom in 1999 and then began his industry career at Merrill Lynch after earning a business degree from Baylor University. James then worked at TD Ameritrade and Fidelity before finding FXCM and DailyFX where he spent 13 years helping to build DailyFX Education.
Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or solicitation to buy or sell any currency contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not warrant its accuracy or completeness and shall not be liable for any direct, indirect or consequential damages that may result from anyone relying on such information.