SVB Financial, a Californnia-based lender to the venture capital industry, has been hit extremely hard, and the losses are now sparking speculation that this will affect other banks and affect the bond portfolios of US banks.
SVB Financial
So the recent news surrounding overnight losses incurred by Californian bank SVB Financial has raised serious issues regarding unrealized losses on bond portfolios and their impact on bank capitalization levels.
The Federal Deposit Insurance (FDIC) projected that the US banks had around $620bn of unrealized losses on securities that were held to maturity or available for sale accounts. This will have implications on the Forex markets too.
The most notable impact of this news was an immediate deleveraging of open FX positions. This was seen through large losses in EMFX currencies, such as the Mexican peso and Hungarian forint, which dropped 2.2% and 0.8%, respectively.
G10 currencies experienced a more mixed result, with higher-beta currencies such as the Canadian dollar and Norwegian Krone losing around 0.3% of their value against the US dollar.
The outperformed was the Swiss Franc, which gained 1.1% against the US dollar. The outperformance may have been partly due to the traditional safe-heaven status of the currency, as well as the recent commitment by the Swiss National Bank to prevent any significant weakening in the franc.
The US dollar experienced a similar mixed result due to both the sell-off in US equities and potential implications of the development of the US banking system and the Fed's ability to push ahead with the previously planned aggressive tightening cycle. That and the US 2-year Treasury yield drop over the last 2 days alone.
Overall, the news of overnight losses has serious implications for FX markets. Monitor further developments in the US banking system.
The most obvious victims will be the Nasdaq and Cryptocurrency. It doesn't help much either that tech stocks have been performing relatively well considering all the rate hikes, but this leaves tech stocks vulnerable to the downside as there wasn't enough hedging taking place.
EURUSD
A recent shift in the SVB Financial-influenced Federal Reserve Curve and its effect on the 2-year EUR:USD swap differential.
The FED sets a benchmark interest rate (Federal Funds rate) and other short-term borrowing costs, which helps to determine market-determined interest rates.
The SVB Financial-inspired repricing of the Federal Reserve Curve results from the shift in market expectations regarding the Fed. The Federal Reserve has recently expressed its hawkish views on future economic policy, leading the market to expect higher interest rates. This has influenced steepening of the yield curve, and long-term rates are increasing faster than short-term rates as investors demand higher returns from longer-term investments in a higher-rate environment.
The steepening of the yield curve has significantly impacted the 2-year EUR:USD swap differential. A swap differential happens when investors or company exchanges rates between 2 different currencies, usually for the purpose of hedging their currency exposure
Right now, the 2-year EUR:USD swap differential has narrowed by 20bps for the euro over the last 2 days. Indicating that the euro's value has strengthened relative to the USD dollar, providing support to EURUSD.
A soft NFP job release could be seen as a sign that the Federal Reserve doesn't have to be as hawkish in its monetary policy as Jerome Powell previously suggested. This can result in a weakening of the US dollar, which could lead to a further narrowing of the 2-year EUR/USD swap differential in favor of the Euro and potentially send the EUR/USD back to its starting level of ~1.07 (This already happened but I originally posted this in my newsletter. You can find the link in my bio)
The effects of this shift in the yield curve have also been felt in other currencies. As we advance, there may be some upside risks to the value of the koruna, but this is unlikely to have a major impact on the Czech National Bank's policy settings.
All in all, the recent shift in the yield curve, as caused by the SVB financial-inspired repricing of the Federal Reserve Curve, has had a marked effect on the 2-year EUR/USD swap differential, sending the euro's value higher.
As we advance, there may be some upside risks to the value of the koruna, but this is unlikely to have a major impact on the Czech National Bank's policy.
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