The issues at Credit Suisse could have caused worries about the strength of the whole banking industry, but there is no agreement about if these will have bad effects on the foreign exchange market in terms of either less liquidity or the euro’s short to mid-term direction.
Last week, UBS took over Credit Suisse, after a period of major changes in the latter’s foreign exchange operations. In late October 2022, Credit Suisse declared that it would join its foreign exchange and interest rate services with its wealth management and Swiss bank divisions, to become a provider of solutions for third-party wealth managers.
It was reported that most of the workers in its foreign exchange voice trading and sales departments had been dismissed.
The events of last week had a varying effect on the interest rates. The EUR/CHF currency pair is especially significant for Europe and Switzerland, as it is linked to investments and trade between the two.
The Co-Founder of Settlement Circle, Julian Gladwin, said:
The question for bank treasurers will be what the impact would be of another rate hike on our liquidity forecasting
On the other side will be how the ECB determines its policy to defend the value of the euro, knowing there could be a potential impact on the banking sector
There may be more danger of infection in the US from the Silicon Valley Bank situation than in Europe from the takeover of Credit Suisse, says Adam Gazzoli, Co-Founder of FX consulting company The Adamis Principle.
He added:
As such, it would seem more likely that the Fed might be inclined to pause rate hiking than the ECB, especially as the former is already further along in its hiking cycle and the ECB is still making hawkish statements, which could translate into a firmer euro versus the dollar
Financial consultant Jason Keogh does not think that Credit Suisse and other banking institutions should try to influence the ECB’s decisions.
He believes this is because the biggest worry of a central bank is still inflation and this is the greatest danger to any economy.
He added:
However, we live in times where market forces can change the mind set and plans of the best of us and the ECB and others may feel pressured into backing down, which would be a disaster long term for the economy
If the ECB changed its thinking it would create a short term boost for the euro, but have a detrimental effect in the medium to long term if inflation continues to increase and the central bank has to hike faster and harder in the future, causing a greater risk of a recession
Henry Wilkes, an experienced professional in the FX Industry and Head of Private Client Services at Oku Markets, believes the European Central Bank will not adjust its stance on interest rate increases. This is because it was much slower than other central banks to start raising rates.
He said:
If you look at market activity this week, the measures announced by the Bank of England and the ECB to shore up credibility in capital strength saw the dollar strengthen, but the euro managed to keep pace with it
This is based on the market believing that the ECB may still tighten and therefore the spread between the Fed and ECB will be tighter than thought a few weeks ago
Richard Longmore, the Managing Director of FX consultancy Finoesis believes Credit Suisse’s issues can lead to discussions about what might happen when the European Central Bank ends its stimulus program.
He said:
It will rightly be dismissed as a badly run bank, but a wider set of issues are hopefully being thought about. The thought ‘if the Fed paused it would certainly help us retain credibility and not spark a ‘what do the ECB know’ moment if we don’t hike’ will be going through their mind
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