The euro and Swiss franc regained some lost ground on Thursday, as markets reacted positively to the Swiss central bank’s support for Credit Suisse, ahead of a difficult meeting for ECB rate-setters.
The euro was up 0.4 per cent at $1.06225 having lost 1.4 per cent a day earlier, its biggest percentage fall in six months, as the focus of fears about the banking sector spread across the Atlantic from the collapsed US-based Silicon Valley Bank to the much larger Credit Suisse.
Some calm was restored to markets after the Swiss lender (CSGN.S) said on Thursday it would borrow up to $54 billion from the Swiss National Bank to shore up liquidity and investor confidence, after its shares on Wednesday plunged as much as 30 per cent.
That helped the Swiss franc to strengthen, and the dollar dipped 0.92 per cent against the franc, to 0.9248, reversing some of its 2.15 per cent surge on Wednesday – the largest daily gain since 2015.
Paul Jackson, global head of asset allocation research at Invesco, said the nature of the banking system, such as its interconnectedness, meant that any troubles in the sector made investors particularly jittery.
“It’s like walking through a forest at night, and if you’re nervous and you hear a sound which could be a squirrel or it could be a bear, you react as if it’s a bear.”
But the news of the Swiss National Bank’s support for Credit Suisse did calm the mood somewhat.
“Now, Credit Suisse has the clout of (the) Swiss National Bank covering its back, which is a central bank that doesn’t mess around in the time of crisis,” said Matt Simpson, senior market analyst at City Index.
“So ultimately, I think this is a good thing for market sentiment.”
ECB IN FOCUS
In what would have been the day’s main event before the banking sector ructions, the European Central Bank (ECB) meets to set interest rates later on Thursday, with a decision due at 2.15 p.m. CET (1315 GMT).
The central bank had all but committed to a 50 basis point hike at this meeting at its previous meeting in February, but recent market turmoil has thrown such expectations into question.
“If recent inflation data clearly underpinned the ECB’s pledge to hike rates by 50bp in March, the ongoing turmoil in the financial sector is casting doubts on whether policymakers will raise rates at all,” said Francesco Pesole FX strategist at ING.
Pricing in derivatives markets currently indicates roughly a 50 per cent chance of a 50-basis-point hike, an increase from earlier in the week.
Pesole said it was also unclear how the euro would react to the ECB’s decision.
“If the ECB 50bp hike comes in an environment where markets are scaling back concerns on the banking sector thanks to the support from the SNB, then this may actually be read as a signal of confidence by Frankfurt on the health of the eurozone banking system, and can ultimately lift the euro.”
“Should the ECB force a hike in a still fragile environment for the European banking sector, the impact on EUR/USD may actually be negative, as investors see this as another major risk for the financial stability in the area.”
Elsewhere, the safe-haven Japanese yen remained in favour even as markets calmed a little.
The dollar was last down 0.5 per cent against the yen at 132.77, a 3.7 per cent slide since the US currency near a three-month high hit on March 8 before markets entered their tailspin.
Sterling was up 0.3 per cent at $1.20890, and the dollar index, which tracks the unit against six main peers, was down 0.34 per cent at 104.29.