Fed takes steps to limit contagion from SVB failure
Following the SVB failure last week, the Federal Reserve implemented an emergency lending facility on Sunday to prevent banks from conducting fire sales of financial instruments to meet deposit outflows and limit contagion to other banks. This rapid action by the Fed has caused US stock market futures to look positive, making a 50-basis point rate hike at the March FOMC meeting unlikely. US Treasury yields have fallen, particularly at the front end. This has caused the USD to weaken and other major currencies to rise.
USDOLLAR/10-year real rate correlation
The real rate's candle for last week shows a dragonfly doji (red arrow).
* Market hawks pushed yields up to a high for the week before losing control to the doves.
* The doves than pushed yields back down to just below the week's open.
This movement was mirrored by FXCM's USDOLLAR index (blue arrow). It will be interesting to see if there is downside follow through this week. It seems that 50-basis points is off the table for March, but the question is whether the Fed goes ahead with 25 bps? They may pause given the danger of banking contagion given the SVB failure. Regulators have already closed New-York-based Signature Bank and said that depositors would be made whole.
USDOLLAR's correlation coefficient with the real rate is 66% (bottom indicator). As long as yields decline and markets reassess the Fed's actions for March, the dollar is likely to be influenced to a large degree.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.