Dollar Again Failed to Capitalize on Risk-off Environment


Core bond yields at least tried to keep their heads above water. After opening on Friday near Thursday’s post-ECB closing levels, trading soon revolved again around expectations for Swiss policymakers to try to hammer out a solution to the Credit Suisse problems in the looming weekend. Safe haven flows made US yields crash 7.5-32 bps, the front end outperforming. German yields tanked 15.5-22.5 bps. Peripheral yield spreads vs. Germany’s 10y yield rose. Italy and Greece lagged peers, adding 4 and 5 bps respectively. Equity markets in Europe and the US lost 1%, give or take. The dollar again failed to capitalize on the risk-off environment; a reminder that the issues for the likes of First Republic Bank in the US aren’t over yet either? Narrowing yield differentials supported EUR/USD from the low 1.06 to 1.067. The trade-weighted dollar index fell through double support at 103.94/96 to close at 103.708. The Japanese yen instead was the grand victor of the day. USD/JPY fell from 133.74 to 131.85. EUR/JPY’s test of 142 failed and ended up in losing 1.5 big figures instead (140.67).

Negotiating around the clock, a deal was indeed made over the weekend. UBS agreed to buy Credit Suisse for CHF 3bn. It comes with a CHF 100bn liquidity backstop by the Swiss National Bank and a CHF 9bn government guarantee to cover potential losses that exceed a CHF 5bn threshold. The deal avoids an imminent collapse of Credit Suisse which could have sparked panic across markets. But it does include a complete CHF 16bn wipe-out of AT1 bonds whereas equity holders still get a little back. It triggers a massive sell-off in that submarket in Asian dealings this morning. The news was accompanied by coordinated central bank action to offer dollar liquidity (see headline below). But the initial sigh of relief in Asian-Pacific markets quickly faded. A 17.5 bps jump in the US 2y yield completely reversed to trade 18 bps lower as we near the European open. Stocks all across the region tumble with Hong Kong underperforming. European/US equity futures turn from green to (dark) red. The Japanese yen is again taking the lead on the currency scoreboard. The Swiss franc trades a little stronger at EUR/CHF 0.867.

This morning’s abrupt sentiment change shows the theme may remain with us for a little longer, causing an ongoing repricing of risk premia as investors count down to the Fed policy meeting later this week. Markets currently see a bigger chance for the Fed to hold rates steady rather than raise them by 25 bps. The latter is our preferred scenario and would display confidence similar to the ECB last week. In the run-up to it though, we’d be cautious to swim against the current tide. In case of outright risk-off, we still favour the dollar over the euro (but not over the yen). ECB president Lagarde appears before the European Parliament today. We expect her to repeat the need for further rate hikes, despite the recent turbulence. Belgium is hitting the bond market today.

News and views

The BoC, the BoE, the BoJ, the ECB, the Fed and the SNB announced a coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements. They have agreed to increase the frequency of 7-day maturity operations from weekly to daily from today until at least through the end of April. The network of swap lines among these central banks is a set of available standing facilities and serves as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses.

Rating agency S&P affirmed the Belgian AA rating. Risks to Belgium’s budgetary position are rising in the context of slowing growth, persistent spending pressures, and the ECB’s monetary tightening. S&P expects the budget deficit to reach 4.9% of GDP in 2023 and net general government debt to stay elevated at 95% of GDP. Nevertheless, proactive debt management has over the past decade significantly improved the government debt profile, with an average maturity of over 10 years and an average effective cost of debt that declined continuously to reach 1.4% in 2022. The stable outlook reflects the view that risks to Belgium’s public finances are mitigated by its resilient economy and strong labor market, as well as its strong institutions. Negative action could follow in case of weaker-than-expected nominal growth or a fast deterioration of budget deficits, as both of them risk putting the debt ratio on a steep upward path. The other big rating agencies, Moody’s and Fitch, scale Belgium one notch lower than S&P at Aa3 and AA- with Fitch also applying a negative outlook.

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