Above: File image, Silicon Valley Bank elevator pitch contest. Photo by Michael Kellet. Source: Flickr. License Terms: Creative Commons 2.0.
The dollar fell amid a recent rout in bank stocks as investors fear signs of distress in the sector are starting to emerge, which could convince the Fed it has done enough on interest rates .
Silicon Valley Bank (SVB) has sent shockwaves through the global banking industry after hitting the market in search of new funding, following losses on its large investment portfolio.
These losses are linked to the underperformance of the technology sector in the current environment of rising interest rates.
One would expect the dollar – a typical safe haven – to rise strongly under such circumstances.
But investors could bet that the developments, combined with Friday’s labor market report, could convince the Fed that now is not the time to press the accelerator on interest rates. The fear of “breaking” something in the financial system could still prove to be a key consideration at the next FOMC meetings.
“The probability of a 50 basis point hike next week has risen from less than 10% to almost 50%, according to rate futures markets. Yet following the SVB announcement, the Fed funds futures markets ruled over rate fears by lowering ratings to below 50%,” said Christian Gattiker, head of research at Julius Baer.
The recent rise of the dollar could therefore be due to a pause.
CNBC reported on Friday that efforts to raise capital have failed, however, and SVB has now put itself up for sale.
Bank stocks came under pressure after SVB Financial Group – the owner of venture capital funding specialist SVB – announced a stock offering and unloaded securities to raise much-needed cash amid falling deposits .
SVB that it was issuing $2.25 billion of stock to bolster its capital position after a significant loss on its investment portfolio
The selloff extended to European names on Friday as traders feared the rapid pace of interest rate hikes at global central banks could ultimately strain the financial system.
Above: Major UK banking names are under pressure. Picture: IG.
SVB’s woes are symptomatic of the steady withdrawal of excess liquidity from the global financial system following the largesse of the Covid years and its shares have crashed 60% in New York trading as it said it lost 1.8 billion following the sale of its investment portfolio.
Meanwhile, global equity markets recorded notable losses as investors became more cautious.
The dollar, yen and franc would be typical beneficiaries of such a development due to their traditional “safe haven” characteristics.
“In 2008, during the global financial crisis, the dollar soared,” said Reuters analyst Jeremy Boulton. “As with current issues, US banks were the focus of concern.”
The Australian dollar, New Zealand dollar and the krone are generally expected to fall in high risk market conditions.
Meanwhile, the Pound tends to lose against the aforementioned safe havens – as well as the Euro – but gain against “high beta” stocks such as AUD, NZD and NOK.
But the exchange rate between the pound and the dollar (GBP/USD) is now quoted 1.2040 percent higher on the day, a performance that defies the typical narrative and suggests that tensions in financial markets could in fact convince the Fed to slow its rate hikes.
The rebound in spot GBP/USD takes bank transfer rates to 1.1608-1.1788, competitive cash and holiday rates to 1.1857 and competitive transfer rates to around 1.1990.
Above: GBP/USD at 15-minute intervals showing recent upside but multi-day downward pressure. The British pound also benefited from a beat in British GDP in January.
The FX market’s lackluster response to the news reflects expectations that SVB news will remain contained.
Silicon Valley Bank has leaned heavily on the tech sector, which has come under severe strain since central banks began raising interest rates.
“SVB does not represent the broader US banking industry, although the fall in SVB shares clearly affected sentiment. interest,” says Neil Wilson, chief market analyst. in Finalto.
Mohamed A. El-Erian, adviser to Allianz and Gramercy, says the possibility of widespread stress in the US banking system due to SVB’s problems is limited.
“While the U.S. banking system as a whole is sound, and it is, that does not mean that all banks are. , the most vulnerable right now are those who are vulnerable to interest rate and credit risk,” he says.
But “the risk of contagion and the systemic threat can be easily contained by careful balance sheet management and avoiding more policy mistakes.”
However, the outlook remains uncertain and fears will grow that the rapid pace of rate hikes will “break” some elements of the financial system.
This would likely keep the dollar broadly supported and there is very little prospect of a rally in the pound as fears abate.
The Federal Reserve is expected to raise rates an additional 50 basis points later in March as it faces stronger-than-expected economic data consistent with above-target inflation numbers.
With that in mind, Friday’s jobs report will be key: a weaker-than-expected report could challenge those expectations and bring some relief to financial markets.
In such a scenario, the Pound, Euro and other currencies could recoup recently lost value to the Dollar.