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The banking crisis could be the black swan that makes a bearish stock market turn around. Ironically, this is usually the case. Investors focus on an event that is initially interpreted as a disaster. Markets react first and then begin to adjust to bad news that, on the surface, turns out not to be so bad. Hopes for the recovery of the U.S. stock indices are faithfully serving the bulls on EURUSD.
Dynamics of the risk premium for the U.S. stocks
In fact, we see only a picture—the bankruptcy of American banks, the takeover of Credit Suisse by its competitor UBS. At the same time, the media, out of habit, is making a big deal out of this. "This is the second-biggest bank failure in the United States in history! This is the largest credit institution since 2008, which voluntarily lost its independence!" Obviously, big headlines sell well, but investors have to learn to see right through it.
And the market situation is such that the Fed and other central banks, in response to the banking crisis, are starting to take measures that are essentially quantitative easing. So MUFG believes that the primary credit, or so-called discount window, has provided $152.8 billion in bank liquidity support, and other credit expansions have raised $142.8 billion in loans to cover the deposits of failed banks. As a result, the Federal Reserve's balance sheet has swelled by almost $300 billion, which means a return to QE.
Just as at the peak of the pandemic, the Fed and other major central banks agreed to use currency swaps not once a week, but every day to meet the system's need for dollar liquidity. We see the crisis and the Fed's response to that crisis. To drown the system in money, which used to lead to a weaker U.S. dollar.
The situation in the banking system of Europe looks better than in the Unites States. So far, at least no one has gone bankrupt there. In addition, investors consider measures to respond to troubled credit institutions to be more effective. Just look at UBS buying Credit Suisse, which is experiencing serious problems. But until recently, the capitalization of the two institutions changed almost synchronously.
Dynamics of capitalization of UBS and Credit Suisse
In the second half of 2020, the euro rose against the U.S. dollar because it seemed to investors that the governments of the eurozone countries were acting more harmoniously in the fight against COVID-19, and the ECB was more effective than the Fed. Something similar is happening now. Europe is coping better with the banking crisis, leading to a EURUSD rally. Christine Lagarde not only reassured investors, but also said that the European Central Bank has more options than the Fed. No wonder speculators are buying euros.
Technically, the EURUSD pair has left the boundaries of the fair value range 1.055–1.068 and is storming the 1.0715 pivot point. Success in this event will allow us to increase the previously formed longs.
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