Yen’s Drop Signals Calm as Currency Markets Open After CS Deal

(Bloomberg) — The Japanese yen fell and the Swiss franc rose after Switzerland’s government brokered a deal to rescue Credit Suisse Group AG, seeking to allay investors’ fears about instability in the global financial system.

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The calm opening for the currency markets came as headlines rolled in about UBS Group AG’s agreement to buy its rival bank and the sweeteners authorities were throwing in to make the deal work. However, traders are bracing for a volatile week as they monitor developments in the US and European banking sectors and await the Federal Reserve’s interest-rate decision Wednesday.

The franc erased its early losses against the dollar amid reports the Swiss National Bank also agreed to offer a $100 billion liquidity line to UBS, which will pay about 3 billion francs ($3.2 billion) in stock for the acquisition. However, with the currency losing some of its haven appeal amid the recent turmoil, traders turned to the yen as their main target in their flight to safety.

UBS to Buy Credit Suisse for CHF0.76 a Share in Stock

“While markets digest the news and the deal remains in this contingent stage, the Swiss franc is unlikely to act as the cleanest haven expression,” said Simon Harvey, head of FX analysis at Monex. “Instead, we’ll be monitoring credit-default swaps spreads and UBS’s share price when discussing the franc in the immediate term.”

The Japanese yen slipped 0.5% against the dollar and 0.9% against the euro. The Swiss franc erased an early loss against the greenback to rise as much as 0.4%, while Europe’s shared currency rose as much as 0.3%. Risk-sensitive currencies like the Australian and New Zealand dollars also climbed.

UBS’s all-share deal is priced at a fraction of Credit Suisse’s $8 billion valuation at the close on Friday and it remains to be seen whether it can contain the crisis of confidence. Meanwhile, Californian authorities are working on a break-up of the collapsed Silicon Valley Bank. The multiple pressure points in the financial system are roiling global markets and leaving the Federal Reserve with a tough choice between carrying on its fight against inflation or taking a pause to prioritize financial stability.

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Volatility skyrocketed last week as fears spread about the health of the global financial system amid the effects of the Fed’s yearlong campaign to fight inflation. Concern about potential contagion sent investors scurrying for haven assets and forced a radical rethink about how tight the Fed — and other central banks — will be able to keep policy.

Front-end Treasury yields were whipsawed by more than 20 basis points every day as investors plowed cash into US securities. US bank equities took a beating and technology stocks turned out to be something of a refuge.

At the close of trade last week, swap markets indicated around a two-in-three chance that the Fed would opt to push ahead with a quarter-point interest-rate increase at its meeting Wednesday, although pricing suggested that it’s likely to end its tightening cycle there. At the height of bank stress concerns earlier in the week, traders had lowered the odds of a quarter point hike to less than half while some banks, including Goldman Sachs and Barclays, changed their rate calls and they now don’t expect a rate hike.

–With assistance from Alice Gledhill and Michael G. Wilson.