Forex » The US dollar rebounds and US Treasuries fall
Risk aversion flows are showing up with dollar strength in US forex despite falling US rates, driven by continued concerns from global banks. But this time, the concern comes from Europe.
The world was rocked last Thursday as new problems at Silicon Valley Bank began to creep into the markets. If a major US bank is under pressure in its own right, it was the potential repercussions that suddenly became the cause for concern, as the issues plaguing SVB could logically be extrapolated to other regional banks. And markets are often unwilling to wait because the slightest sign of trouble can lead to changes in the behavior of stock market investors and depositors, which can then put the bank under even more pressure.
The weekend announcement of security deposits as SVB and Signature Bank were designed to bring calm, as was Monday’s presidential allowance. And waiting for a judicial moment, it worked, but the same extrapolation that led to the punishment of banking stocks last Thursday still lurks in the margins, and this morning it began to show up in Europe as the Swiss credit came under renewed pressure following comments from one of the bank’s biggest investors.
Years of low, negative rates created investment vulnerability in banks’ portfolios as higher rates took the world by storm. And tomorrow contributes together ECB rate decision where rates were expected to rise again, and with inflation at 8.6% last month and 8.5% for this month’s preliminary reading, it doesn’t look like the European Central Bank is anywhere near a point where they can walk away from price increases without risking even higher levels of inflation (and bigger problems down the road).
Leak to the US dollar
American dollar (DXY) is bouncing in forex and the daily chart is currently showing an unfinished morning star formation, which is being followed with the aim of bullish reversals. The support point that held the lows yesterday, helping to build the doji, was at a familiar level of 103.45, and the next resistance is around the 105.00 handle.
Daily Dollar Indices (DXY) Chart
US rates fall on risk aversion concerns
When concerns rise, investors may avoid return on capital in favor of return on capital, which may mean abandoning higher yielding investments for those with greater perceived security. This usually indicates flows into US Treasuries and this morning saw a sharp rise in US Treasury prices with yields falling after yesterday’s rebound.
The two-year rate saw its yield fall to a fresh six-month low this morning, completely erasing yesterday’s rebound that had built in as hopes began to percolate that the banking saga may have been dealt with adequately.
Two-Year U.S. Treasury Rendering
EUR/USD in the spotlight ahead of ECB meeting tomorrow
Inflation remains an issue in Europe as the current price reading is at 8.6% and the preliminary price reading is 8.5%. We will have the final reading of this data point on Friday; Further ahead of the finish, we have a rate decision from the European Central Bank on the economic calendar for tomorrow.
The ECB was expected to raise rates by 50 basis points at this meeting to deal with this inflation. But, keeping with the problems that have emerged in European banks, there is already a quantum question mark over whether they will be fair and – if they are police – there are worries about what might happen next.
Higher rates depress the value of bond and fixed income portfolios, which can create capitalization problems at these banks, as they sit on unrealized floating losses due to the rapid movement of higher rates. high after years of low and negative rates. Add to that a bank run with depositors withdrawing their capital (premium more collateral from these wallets), there is a recipe for disaster.
How could the ECB manage this scenario? We’ll have to watch to find out, but in response, the Euro fell sharply in forex ahead of this rate meeting and price is currently sitting above a key support zone around the 1.0500 handle. This is the same area that came into play in the first week of the New Year to help hold the lows, leading to an extension of the upside move to 1.1033.
If the sellers cannot get the price past this support zone, there is another level with longer term interest around the 1.0350 level.
EUR/USD daily chart
Strength of the yen on the forex
I discussed this on Monday and again in yesterday’s webinar, limiting the potential for yen strength in forex in lower rate scenarios.
please wait for it USD/JPY started higher for much of 2021 and the first nine months of 2022 carry trade was the driving force as higher US rates and low Japanese rates kept the long side of the pair bristling. But, since the rate picture started to turn around, USD/JPY along with mid-October last year, resulting in a nearly three-month 50% retracement of the trend that my 21 month will be built.
The pare rebounded from the 50% marker of this move in mid-January, which extended into the past month as the Bank of Japan began to shift to new leadership towards a new governor expected to support policy. control of the bank’s yield curve.
But as the rate began to fall in the US, the pull of the carry increased and this led to an unraveling, which highlighted the USD/JPY pair as one of the major currency pairs reflecting the weakness. US dollar that day. Price is testing below the 38.2% retracement of the same Fibonacci retracement that widened to dig the low in January, and a close below this level highlights 131.58 and 130.40 as next points of support on the USD/ JPY chart.
USD/JPY Weekly Chart
By 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 started trading stocks while waiting for the tech boom in 1999 before starting 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.
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