Credit Suisse, Switzerland’s second-largest bank, suffered a massive blow to investor confidence after its largest shareholder, Harris Associates, announced its inability to provide any further support to the embattled lender. In response, Credit Suisse’s shares (CSGN.S) plummeted by as much as 30% on Wednesday, prompting the Swiss National Bank to provide a financial lifeline to the struggling institution. Credit Suisse has announced its intentions to borrow up to $54 billion from the bank to help steady the ship.
The announcement came amid mounting concerns that the recent turmoil unfolding across banks in the US and Europe could be a harbinger of a widespread systemic crisis, leading investors to flock to safe-haven currencies like the US dollar and Japanese yen. As a result, the yen saw a jump of about 0.5% in early Asia trade on Thursday, extending Wednesday’s 0.6% gain. Meanwhile, the dollar pared back some of its previous session’s 2.15% surge against the Swiss franc, but remained pinned near a one-week low.
“We’ve got some fresh turmoil in the European banking sector, and things are still very fluid at the moment,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA). “Given the elevated uncertainties and concerns about broader financial contagion, the dollar, as well as the yen, will be the main beneficiaries because of safe haven demand.”
While currency markets remained relatively stable, the same could not be said for Credit Suisse’s shares. The bank is currently battling to recover from a string of scandals that have undermined the confidence of investors and clients. The collapse of US-based Silicon Valley Bank (SVB) last week has only served to fuel investor concerns. This was followed two days later by the collapse of Signature Bank, which forced US President Joe Biden to reassure the public that the financial system was safe, prompting emergency measures to give banks access to more funding.
Investors are on tenterhooks as they await further clarity on how widespread the fallout from these recent events could be. Despite rescue measures from authorities, there are still heightened fears about the potential for a widespread systemic crisis. The focus has also turned to how central banks will navigate their paths on future rate hikes, with policymakers left in a bind on how much further they should raise rates to stem inflation without triggering a financial sector shakeout.
The European Central Bank (ECB) met on Thursday to announce its interest rate decision, but traders had already moved to scale back their bets on a 50-basis-point rate hike in light of the recent events surrounding Credit Suisse’s shares. Two supervisory sources told Reuters that the ECB had contacted banks on its watch to quiz them on their exposure to Credit Suisse.
“There is certainly a risk that the ECB will not follow through with its pre-commitment of a 50-basis-point hike because of financial stability concerns,” said CBA’s Kong. “It will definitely be a tough call for any major central bank to stick with its tightening path.”
Meanwhile, risk-sensitive currencies like the Australian and New Zealand dollars have struggled to make headway after having slid close to 1% each on Wednesday. The Aussie was last 0.09% higher at $0.66275, while the kiwi fell 0.57% to $0.61525, further pressured by weak economic data released on Thursday that showed New Zealand’s economy shrinking in the fourth quarter.
Investors are likely to remain cautious in the near term, given the ongoing concerns surrounding Credit Suisse and the potential for further fallout. The situation remains fluid, and it will be crucial to monitor how central banks respond to these events in the coming weeks and months.