FX markets calmer after CS deal, but Fed remains endurance test

(Bloomberg) – Forex markets signaled an improvement in sentiment after Switzerland brokered a bailout of Credit Suisse Group AG, but traders braced themselves for a volatile week as they weighed the deal’s impact on the Federal Reserve’s monetary tightening path .

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The Japanese yen fell and the Swiss franc rose after UBS Group AG agreed to buy its rival bank for around $3.2 billion and authorities threw in sweeteners to make the takeover work. While this calmed traders’ worries about the stability of the financial system, it left some wondering whether the Fed will now be able to raise interest rates faster and higher than markets recently anticipated.

UBS buys Credit Suisse for CHF 0.76 per share

The yen is sensitive to the reassessment of Federal Reserve interest rate policy and US bond yields, so the moves “could be in anticipation of what this could do to Fed curve prices this week,” said Mazen Issa, a senior strategist at TD Securities in New York. Still, it’s “very early to tell now given the liquidity,” he said.

As of last week’s close, swap markets were suggesting about a two-in-three chance that the Fed would push a quarter-point rate hike at its Wednesday meeting, though pricing suggested it’s likely to end the tightening cycle there. At the height of bank stress worries earlier in the week, traders had cut the odds of a quarter-point hike to less than half, while some banks including Goldman Sachs and Barclays have changed their rate calls and now expect no rate hike.

The Japanese Yen lost 0.5% against the Dollar and 0.9% against the Euro. The Swiss franc erased an early loss against the greenback, gaining as much as 0.4%, while the European common currency gained as much as 0.3%. Risk-sensitive currencies such as the Australian and New Zealand dollars also appreciated.

However, with the Swiss currency losing some of its haven appeal in the face of the recent turmoil, traders have turned to the yen as their primary target in their flight to safety.

“While markets digest the news and the deal remains in this conditional phase, the Swiss franc is unlikely to act as the cleanest haven term,” said Simon Harvey, head of FX analysis at Monex. “Instead, we will monitor credit default swap spreads and UBS share price when we talk about the franc in the short-term.”

UBS’s all-share deal is a fraction of Credit Suisse’s $8 billion valuation at Friday’s close and it remains to be seen if it can contain the crisis of confidence. Meanwhile, the Californian authorities are working to break up the collapsed Silicon Valley Bank. The multiple pressure points in the financial system are shaking global markets and presenting the Federal Reserve with a difficult choice whether to continue its fight against inflation or to pause and prioritize financial stability.

UBS buys Credit Suisse in historic deal to end crisis

Volatility spiked last week as concerns spread over the health of the global financial system amid the fallout from the Fed’s years-long anti-inflation campaign. Contagion concerns sent investors scrambling for safe haven assets, forcing them to radically rethink how tightly the Fed – and other central banks – will be able to maintain policy.

Front-end Treasury yields tumbled more than 20 basis points each day as investors poured cash into US securities. US bank stocks took a hit and technology stocks proved a haven of sorts.

–Assisted by Alice Gledhill and Michael G. Wilson.

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