- Buy-in to safe-haven US Dollars amid a banking crisis weighs on the GBP/USD exchange rate.
- Credit Suisse is only the tip of the iceberg, according to Bob Michele, CIO of JPMorgan Asset Management and global head of fixed income.
The news that Credit Suisse’s largest shareholder said it could not provide the Swiss bank with additional financial assistance on Wednesday caused new unease to sweep the world markets, prompting the CEO of the Swiss bank to reaffirm the Swiss bank’s financial stability. GBP/USD continuation traders are in the market.
Following the failure of Silicon Valley Bank last week, investors’ concerns about the resiliency of the global banking system have been rekindled as Credit Suisse struggles to recover from a series of scandals that have damaged the institution’s reputation and the confidence of its clients and investors. The institution’s declining stock price also adds to investors’ concerns. Ulrich Koerner, CEO of Credit Suisse, attempted to assuage fears by stating that the bank’s liquidity base remained solid and was far in excess of all regulatory criteria.
Analysts claim that Credit Suisse is just the beginning of a larger, worldwide financial crisis, which has investors concerned. In an interview with Jonathan Ferro on “Bloomberg The Open,” Bob Michele, CIO of JPMorgan Asset Management and global head of fixed income, claims that Credit Suisse demonstrates the lagged impact of central bank tightening have caught up, adding that this is just the tip of the iceberg with much more consolidation and pain to come. “So you put your money into the highest quality assets that you can find,” Bob Michele advises. The Federal Reserve should pause, he adds.
Concerns over the Swiss bank in this regard led to a dramatic drop in the yields on US and European bonds as investors questioned whether the Federal Reserve and other central banks could maintain raising interest rates to fight inflation. The largest decline in two-year Treasury notes since the week of Black Monday on October 19, 1987, has occurred in the last five days, when they have dropped 98 basis points. These notes follow interest rate forecasts. They paid as little as 3.72% on Wednesday after dropping as low as 4.413%. Markets were preparing for the resumption of significant Federal Reserve interest rate increases just last week, but they are now pricing in an 80% chance of a 25 basis point hike next week and a 50% chance of no change. Also, the December Fed funds futures, which represent the overnight rate that banks use to lend to one another, have fallen to 3.62% in an indication that the market anticipates the Fed to slash interest rates by the end of the year, if not earlier.
Safe haven USD buying overshadows UK budget
Nonetheless, safe-haven buying has helped the US Dollar gain ground. The DXY index, which compares the value of the dollar to a basket of other currencies, shot up from 104 to 105.103, destroying everything in its path, including GBP and the UK government’s budget.
The measures outlined by Chancellor Jeremy Hunt are thought to be an effort to encourage investment and productivity without placing additional strain on the public finances, which would otherwise cause GBP to respond favourably. But, up until now, the risk-off themes have neglected such favourable effects for Sterling. The Chancellor delivered what he dubbed a “budget for growth,” claiming that the UK economy is on the right track and that the government’s plan for the economy is “working”.
Source: Team CurrencyVeda