USD/JPY bounces off from 131.60 level after some joint effort from global central banks on liquidity
- USD/JPY bulls cheer as UBS set to take over Credit Suisse.
- Global central banks unite to offer liquidity via US Dollar swap lines.
- Two major banks in Europe are examining scenarios of contagion.
USD/JPY looks to consolidate just above the 131.50 mark amid a jittery environment fueled by the Credit Suisse fallout during the weekend. Finally, Credit Suisse is going to be taken over by UBS as the Swiss authorities persuaded the latter on Sunday to make a bid for a takeover.
The news came just after some of the world's top central banks started to offer daily loans in US dollars to their banks to reduce any stress in the financial system.
In this globally coordinated response, the Federal Reserve (Fed) has also stepped in along with the Bank of Canada (BoC), Bank of Japan (BoJ), Swiss National Bank (SNB), and the European Central Bank (ECB).
The liquidity injection will be done through swap lines, where central banks can offer US Dollar operations with seven-day maturity. The emergency swap line was first introduced during the COVID pandemic to ease US Dollar availability.
Prior to this joint effort, the Fed had already opened the discount window for commercial banks, and the banks have borrowed nearly $164 billion amid this liquidity crisis. As a result, we have seen a slight spike in the Fed balance sheet despite the ongoing Quantitative Tightening (QT) program. One can attribute this as a mini version of QE, which is contrary to the ongoing QT. We have seen the same scenario with the BoE a while ago during the pension fund crisis.
It seems contagion in the global banking sectors is not looking to be tamed yet, citing some Reuters reports. At least two major banks in Europe are examining scenarios of contagion in the region's banking sector and are looking to the Federal Reserve and the ECB for stronger signals of support.
It's important to note how the Fed will address this entire situation in their upcoming FOMC meeting this week and whether are they able to deliver the expected 25 basis point rate hike.
