Yen strengthens as central banks work to contain banking crisis


The Japanese yen rebounded after a steep fall at the beginning of Monday's trading session in Asia as global banking authorities worked together to contain the current banking crisis.

The yen, a currency sensitive to the fluctuation of long-term Treasury bond yields, traded flat against the greenback at 131.79 per dollar, maintaining its 2.5 percent gain from last week.

Meanwhile, the U.S. 10-year Treasury yield declined sharply ahead of the opening of European trading. The 10-year yield wiped out the 12-basis-point increase from earlier. Bond yields fall when bond prices rise, usually an indicator of expectations of lower interest rates.

Over the weekend, six central banks — the U.S. Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Swiss National Bank and Bank of Japan — announced a collaborative effort to boost market liquidity following the recent banking crisis.

The crisis began when two large regional banks in the U.S., Silicon Valley Bank and Signature Bank, were shut down by the country's financial authorities following liquidity issues. The market became concerned about the banking system's stability, causing the financial sector to crash on Wall Street at the beginning of last week.

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The U.S. financial regulators designed strategies to contain the possible spillover effect from the failure, which includes establishing a lending facility so that banks can boost liquidity.

However, Switzerland's Credit Suisse later reported a liquidity issue as well, indicating that the banking sector in Europe was also troubled. The Swiss National Bank offered a $53.7 billion lifeline to boost Credit Suisse's liquidity, but the aid did little to reassure the market.

Recent news revealed that the Swiss central bank had agreed to a buyout of Credit Suisse by rival bank UBS but at a significantly lower price than the market value of $3.25 billion. The acquisition contract also included a $17 billion debt writedown.

"The market's driving force is risk aversion," Takahiro Sekido, chief Japan strategist at commercial bank MUFG, said. "I'm not so pessimistic, but still we have to wait and see how much we will see risk contagion from Europe."

Sekido added that he expected the yen to perform strongly, at least within this week, as financial markets observe the impact of central banks' recent program.

U.S. dollar flat

While the yen strengthened, the greenback traded sideways. The U.S. dollar index, which tracks the U.S. currency against six other peers, was 103.80. The index posted a weekly decline of 0.7 percent last week.

The Australian dollar traded 0.2 percent lower against the U.S. dollar at $0.6683, slightly below its critical level of $0.67. Meanwhile, the kiwi was down 0.3 percent to $0.6250, wiping out up to 0.7 percent gain it earned earlier.

The euro and sterling were both flat against the greenback, trading at $1.0671 and $1.2189, respectively.

Investors anticipating Fed’s meeting

The U.S. Federal Open Market Committee (FOMC) will hold a rate-setting meeting on March 21 to 22. The market still projects a 25-basis-point increase by the Fed in the next meeting, a more dovish expectation from the 50-basis-point increase consensus from earlier this month.

Analysts said the Fed would likely hold back from implementing an aggressive rate hike after the turbulence in the banking sector. They explained that the central bank's tight monetary policy partially contributed to the collapse of SVB and Signature.

Both banks experienced a shortage in liquidity as many of their customers made large amounts of withdrawals over the past months. SVB and Signature served a lot of startup customers, who had trouble obtaining financing due to high interest rates.