The US Dollar (USD) trades flat with the US trading session coming online for this Tuesday, and again easing the Greenback as seen on Monday in a similar pattern. Markets were pricing in again some risk premium as Israel looks set to start its ground invasion in Rafah, and Egypt has chored up its border control at its northern border with Gaza. Meanwhile substantial easing in the Australian Dollar (AUD/USD) and Japanese Yen (USD/JPY) added to support for the Greenback, though those gains are starting to ease as well with New York opening up.
On Tuesday, the US Redbook Index and the Economic Optimism measured by the TechnoMetrica Institute of Policy and Politics are the two main economic data points to be released. In this week's rather packed US Federal Reserve (Fed) speakers’ agenda, only Federal Reserve Bank of Minneapolis President Neel Kashkari is set to speak. Meanwhile, traders can digest the release of the Senior Loan Officer Opinion Survey (SLOOS) for the first quarter, which pointed out on Monday that tightened lending standards are still the norm while consumer delinquencies are picking up.
The US Dollar Index (DXY) ticks up on Tuesday after Dollar bulls were able to close above 105.00 on Monday after a correction move in recent days. This could be crucial for the rest of the week and could see the DXY tick up further from here. Although no real major known catalysts are foreseen for this week, a recovery back to 106.00 could be plausible if USD/JPY rallies further towards 157.00
On the upside, 105.52 (a pivotal level since April 11) needs to be recovered through a daily close above this level before targeting the April 16 high at 106.52 for a third time. Further up and above the 107.00 round level, the DXY index could meet resistance at 107.35, the October 3 high.
On the downside, the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.54 and 104.25, respectively, should provide ample support. If those levels are unable to hold, the 100-day SMA near 103.89 is the next best candidate.
The Banking Crisis of March 2023 occurred when three US-based banks with heavy exposure to the tech-sector and crypto suffered a spike in withdrawals that revealed severe weaknesses in their balance sheets, resulting in their insolvency. The most high profile of the banks was California-based Silicon Valley Bank (SVB) which experienced a surge in withdrawal requests due to a combination of customers fearing fallout from the FTX debacle, and substantially higher returns being offered elsewhere.
In order to fulfill the redemptions, Silicon Valley Bank had to sell its holdings of predominantly US Treasury bonds. Due to the rise in interest rates caused by the Federal Reserve’s rapid tightening measures, however, Treasury bonds had substantially fallen in value. The news that SVB had taken a $1.8B loss from the sale of its bonds triggered a panic and precipitated a full scale run on the bank that ended with the Federal Deposit Insurance Corporation (FDIC) having to take it over.The crisis spread to San-Francisco-based First Republic which ended up being rescued by a coordinated effort from a group of large US banks. On March 19, Credit Suisse in Switzerland fell foul after several years of poor performance and had to be taken over by UBS.
The Banking Crisis was negative for the US Dollar (USD) because it changed expectations about the future course of interest rates. Prior to the crisis investors had expected the Federal Reserve (Fed) to continue raising interest rates to combat persistently high inflation, however, once it became clear how much stress this was placing on the banking sector by devaluing bank holdings of US Treasury bonds, the expectation was the Fed would pause or even reverse its policy trajectory. Since higher interest rates are positive for the US Dollar, it fell as it discounted the possibility of a policy pivot.
The Banking Crisis was a bullish event for Gold. Firstly it benefited from demand due to its status as a safe-haven asset. Secondly, it led to investors expecting the Federal Reserve (Fed) to pause its aggressive rate-hiking policy, out of fear of the impact on the financial stability of the banking system – lower interest rate expectations reduced the opportunity cost of holding Gold. Thirdly, Gold, which is priced in US Dollars (XAU/USD), rose in value because the US Dollar weakened.
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