The recent banking crisis in the United States and Europe has raised concerns about the stability of the global financial market. Strong shockwaves are rippling through the financial market, with two of the largest banking failures in US history and the hurried bailout of Swiss Bank Credit Suisse.
With the recent trend of events, investors are concerned about their investments' safety and the forex market's welfare. In this piece, we dive into the impact of the banking crisis on the forex market.
Overview of the Global Banking Crises
Early in March 2023, the U.S. populace was hit with the news of multiple bank closures. The supposed banks were popular among Tech companies and the cryptocurrency market, making the news a major interest in the global financial market.
By March 16th, many financial commentators reported a full-blown banking crisis in the United States. There were several reports of the Fed taking over some banks while others shut down operations on liquidity terms.
The first bank to fold was cryptocurrency-based Silvergate Bank. The bank announced its lending portfolio losses on March 8th. Next was the Silicon Valley Bank (SVB). The news of SVB's closure became public on March 10th, shortly after speculations of its failed attempts to raise capital. Upon its announcement, regulators took over the operations of the bank.
Another top bank taken over by regulators is the crypto-friendly bank Signature Bank. This happened on March 12th, and according to regulators, its closure is due to "systemic risks." Financial analysts have described the closure of SVB and Signature Bank as the second-and third-largest bank failures in U.S. history. They have been described as similar to the 2008 Washington Mutual crisis, which ranks as the largest U.S. bank failure in history.
The Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, and the United States Department of Treasury have tried to resolve the current crisis. The three bodies issued a joint statement assuring the public they would ensure that all deposits at Silicon Valley Bank and Signature Bank were honored.
In line with these efforts, the Federal Reserve has unveiled the Bank Term Funding Program (BTFP). The program will provide loans of up to one year to banks, savings organizations, credit unions, and other qualified entities.
On March 19th, the banking crisis became global with news of UBS acquiring Credit Suisse. This deal was sealed in an all-stock takeover valuing Credit Suisse at 3 billion Swiss francs ($3.2 billion). The acquisition was supported by a 9 billion Swiss francs short-term loss guarantee from the Swiss government and $108 billion of liquidity from the Swiss National Bank.
Banks in China are not exempt from the ongoing crisis. The impact is, however, less drastic in China, with a majority of the best-performing banks during this bank crisis in March. It suffices to say that China has felt the effects of the global banking crisis less than other countries, despite the impact of the 2020 pandemic. It is also important to note that the ongoing banking crisis has revealed the relative stability of the Chinese banking system.
Another country that has felt some of the global effects of the banking crisis is Japan. When the Topix banks index fell by 17% in the middle of March, the central bank of Japan convened a crisis meeting. The banking crisis in Japan can be linked to the announcement of SVB's closure and the peculiarities of Japan's regional banking sector.
Weighing the Impact of The Banking Crisis Against the Forex Market
Central banks, authorities, and government officials have taken unprecedented steps to combat the impending global banking crisis in the last two weeks. There have also been immense efforts and contributions from key market players to avoid a market contagion.
The Federal Reserve has taken the lead in the U.S. and offered to provide adequate funding to the banking sector. Officials are also contemplating extending insurance coverage to cover all deposits. Proponents have also proposed extending FDIC's $250,000 insurance coverage to uninsured assets. The efforts of U.S. authorities are strong indications the authorities are set to bail out any financial institution if need be.
On the European side, the Swiss National Bank has made efforts to reassure investors and the general public about the safety of their funds. The Swiss National Bank has released some statements encouraging investors to reestablish trust in the Swiss financial market.
All of the efforts made by regulators and authorities have directly impacted the financial market, the value of currencies, and the current exchange rate. The recent reflections of the Forex market are a product of the decisions and efforts of authorities and regulators.
According to currency strategist Christopher Wong, "The broader risk sentiment appears to have been suspended as concerns about bank contagion fade and a rally in Chinese equities drew some attention." He projected that "while risk sentiment somewhat held up this week, month-end flows alongside risk-on, risk-off flows will cause two-way trade."
As of March 30th, 2023, the U.S. dollar was bullish as investors shifted their focus to the Federal Reserve's fight against inflation. The dollar index, which compares the U.S. currency to six main rivals, increased 0.097% to 102.73 after rising 0.19% overnight. On the other hand, the index was on track to fall 2% in March due to market fluctuations caused by the recent banking crisis.
The euro was down 0.13% to $1.0829, but it was still on pace to finish the month up 2%. Sterling last traded at $1.2297, down 0.11% from the previous day, after falling 0.2% on Wednesday, March 29th, 2023.
After dropping 1.5% overnight, the Japanese yen gained 0.05% to 132.77 per dollar. In the run-up to the closure of the Japanese fiscal year on Friday, March 31st, 2023, the yen has been unstable. The Australian dollar declined 0.21% to $0.667, while the New Zealand dollar dropped 0.22% to $0.621.
Update on Stocks As Banking Crisis Calms
As of March 30th, 2023, global stocks have become more stable. This is primarily due to investors' speculations that the banking crisis is ending. In this regard, the financial market is expected to end Q1 2023 on a positive note. In line with this, global equities were up 0.3%, putting them on track for a 4.9% quarterly gain by the end of this month.
Mike Hewson, a senior markets expert at CMC Markets, believes that "we are beginning to see some stabilization and a clearer perception that the banking crisis is behind us." He emphasized that the coming days will be a critical measure of the extent of the financial market stabilization.
On Wednesday, March 29th, 2023, U.S. stocks recovered strongly, with the S&P 500 rising by 1.4% and the Nasdaq 100 rising by 1.8%. These statistics bring its total increase from October 2022 to 23%. This indicates that the market is now in a bull market. The S&P 500 gained in all 11 categories, with real estate, information technology, and consumer discretionary top on the list.
In business news and movements, Intel shares climbed 7.6% upon its announcement that it was launching a new and more advanced chip. Micro also increased by 7.2% after providing upbeat sales forecasts. Lululemon also increased by 12.7%, much more than its analyst anticipated.
Despite the recent banking crisis, the Euro Stoxx 600 is now up 19% from October 2022. It is also poised to join the bull market if it maintains a stable increase. However, investors are still defensive, favoring businesses with solid capital flows and those that can endure a possible slump. This is expected, judging by previous incidents of financial market crises.
On the Euro Stoxx 600 top board, Rolls Royce, Saab, and Rheinmetall are comfortably ranked, with each stock up by 50% more than the previous year. Stock records have revealed that utilities, which usually do well in recessions, are positively influenced by the market crisis. The records show that Millicom International Cellular and Telecom Italia were up 40% from the previous year.
Officials in the United States have emphasized that the measures taken regarding SVB and Signature Bank were taken to prevent the crisis from extending to other institutions and to safeguard its clientele. These actions have curtailed the further spread of the crisis in other regions.
Unfortunately, Credit Suisse depositors are not as lucky as their counterparts in the U.S. These Swiss investors are at risk of losing their funds after the value of the bank's tier-1 notes was written down to zero.
According to current market forecasts, the banking situation is expected to improve. As a result, banks and depositors have grown more confident that their funds are secure. This confidence has impacted this week's financial records as there has been a broad rebound in financial equities. However, many equities are still much lower than at the beginning of March 2023.
While we are waiting to see how stable the financial market will be in Q2 2023, it's best to keep our fingers crossed as events unfold in the Forex market. In line with this, investors need to follow Forex live updates to stay abreast of changes in the forex market.