The US dollar extends its losses against the rest of the major currencies as the SVB repercussions limit the expectations of a US interest rate hike. We witnessed a rapid collapse of the gains of the USD/JPY currency pair during the last three trading sessions. It is starting from the resistance level at 137.90, reaching the support level at 132.28, its lowest in a month, before settling around the level of 133.20 at the time of writing the analysis.
Global short-term bond yields are collapsing as investors bet that global central banks will have no choice but to moderate their intentions to raise interest rates in the wake of the collapse of the Silicon Valley Bank (SVB). In the forex markets, the US dollar fell sharply amid falling bond yields and the British pound rose along with the euro.
SVB sent shock waves through the global banking sector after it went to the market in search of new financing, following losses in its main investment portfolio. Over the course of the weekend, authorities in the US and UK moved to protect SVB depositors, as the UK government facilitated the sale of UK SVB assets to HSBC. Before the SVB's difficulties, yields on two-year US government bonds rose to levels not seen since 2007 as markets favored a 50 basis point rate hike at the Fed.
But those expectations have since reverted and the two-year US yield stands at 4.26%, after falling 5% on Friday and another 7% on Monday.
The US dollar extended losses amid the news, with Signature Bank in the US the latest to come under pressure, underscoring the realization that the Federal Reserve's fast interest rate is having an impact on the performance of the financial system. So far, the damage has been limited to lenders dealing with the cryptocurrency and technology sectors, but investors are betting the Fed will be wary of spreading pressure.
Meanwhile, shares in another US bank - First Republic Bank - came under significant pressure on Monday after it said on Sunday that it had secured additional financing through JPMorgan Chase. First Republic's announcement came after its share price took a hit last week in the wake of a run on SVB. For his part, Gayati Bharadwaj, an analyst at Barclays Bank, says: “For the time being, the first reaction to the financial stability dimension was negative for the dollar through the cautious re-pricing of the Federal Reserve Bank.”
Credit analysts at Barclays do not believe SVB poses a systemic threat to the broader banking system and so contagion will be limited.
Dollar expectations against the Japanese yen today:
- The bearish shift in the price of the USD/JPY currency pair continues.
- The moves toward the support levels 131.85 and 130.00 will confirm the strong shift of the trend to bearish.
- The last level is important to push the technical indicators towards oversold levels, according to the performance on the daily chart below.
- The return of the currency pair towards the resistance level of 135.40 will be important for the bulls to control the trend again.
Today, the dollar/yen currency pair will be affected by developments in the US banking system, as well as the announcement of US inflation readings.
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