The greenback is stabilizing ahead of today’s FOMC meeting. DXY was marginally weaker by 0.1% to 103.22 in the overnight market. Monday’s 0.4% depreciation to 103.28 was modest despite the coordinated efforts of the Fed, the Bank of Canada, the Bank of England, the Bank of Japan, and the European Central Bank to enhance USD liquidity via swap line agreements. Unlike March 2020, Sunday’s swap lines came ahead of a 25 bps Fed hike expected today and not after a 100 bps rate cut to address the acute USD liquidity shortages ahead of an imminent deep recession triggered by the Covid-19 outbreak. Instead, today’s swap lines are part of the policy responses to reassure financial markets that the banking turmoil sparked by Silicon Valley Bank and Credit Suisse would not result in another global financial crisis.
US Treasury Secretary Janet Yellen soothed nerves that this was not another solvency crisis and signalled more support, if needed, for smaller bank against further contagious depositor runs. The Dow, S&P 500, and Nasdaq Composite indices rebounded by 1%, 1.3%, and 1.6%, respectively. JPY shed its haven appeal and depreciated 0.9% to 132.5 per USD. Brent crude oil prices rebounded to USD75 per barrel after hitting USD70 on Monday. The US Treasury 2Y yield firmed a second day by 19 bps to 4.17%, while the 10Y yield rose by 12.5 bps to 3.61%.
Considering the market volatility over the fortnight, DXY was relatively stable, slightly below the 103.5 average of this year’s range between 100.8 and 105.9. DXY had depreciated sharply in November-January from the Fed’s downsizing hikes from 75 bps in November to 50 bps in December to 25 bps in February. The greenback’s recovery in February-March was modest despite the UST 2Y yield hitting a 15-month high of 5% on the Fed’s push for “higher for longer” rates. Fed Chair Jerome Powell will likely weigh in on Yellen’s assurances that regulators had the back of uninsured depositors and would safeguard the banking sector.
The press will likely question Powell regarding Senator Elizabeth Warren’s attacks that he has failed on monetary policy and regulation. On the former, Powell will reaffirm the Fed’s priority to control inflation. We cannot rule out the Fed lifting this year’s target for the Fed Funds Rate from 5.1% in its Summary of Economic Projections. On the latter, Powell will reassure that the investigations into the Fed’s oversight of Silicon Valley Bank will be conducted humbly, thoroughly, transparently, and swiftly, with the review scheduled for release on 1 May. Hence, it may be the markets and not the Fed that will shift to a wait-and-see mode.
We are keeping an open mind for the DXY to regain its footing, just as the GBP did after the Tory government and the Bank of England acted sufficiently to contain the September UK mini-budget crisis. We are also trying not to read too much into the swap lines. The BOE hiked by a larger 75 bps in November despite its bond buying programme to stabilize UK financial markets into January. The DXY’s recovery hinges on the UST 2Y yield extending its rise above 4% and how quickly other central banks join the Fed in reaffirming that the job of controlling inflation has some ways to go.
Quote of the day
“Our intervention was necessary to protect the broader US banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose risk of contagion.”
US Treasury Secretary Janet Yellen
22 March in history
The League of Arab States was formed in Cairo in 1945.
Topic
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.