Bitcoin and gold spike as central banks coordinate efforts to halt the banking contagion
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(Kitco News) - Five of the world's top central banks, including the Federal Reserve, the European Central Bank, the Swiss National Bank, the Bank of Canada and the Bank of England, have announced a coordinated effort to keep U.S. dollars flowing through the global financial system amid the biggest banking crisis since 2008.
The action by the central banks was announced via a press release on Sunday, which said that they would be enhancing “the provision of liquidity via the standing U.S. dollar liquidity swap laine arrangements.” Swap lines are an agreement between two central banks to exchange currencies.
“To improve the swap lines' effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily,” the release said. “These daily operations will commence on Monday, March 20, 2023, and will continue at least through the end of April.”
The swap line system was established to serve as a liquidity backstop that can help ease the strains in global funding markets, which helps to mitigate the effects the strains have on the supply of credit to households and businesses. The Federal Reserve previously utilized the swap lines for emergency actions during the 2007-2008 global financial crisis and during the Covid pandemic.
The new swap line agreement between the five central banks started operation on Monday and will continue to operate until April 30 at the earliest, with the potential for it to remain open longer. The ultimate goal of the switch to daily 7-day maturity operations is to help calm exchange rate volatility and avoid strains in the supply of credit.
The coordinated response follows the recent struggles of several prominent banks, including Silicon Valley Bank and Signature Bank in the U.S., as well as Credit Suisse in Europe, which has now been taken over by UBS and the Swiss National Bank.
While a variety of factors have contributed to the unfolding bank contagion, the main culprit is the Federal Reserve and its aggressive interest rate hikes, done to tamp down inflation. The Fed has raised borrowing costs by 450 basis points since March 2022, which has hit asset markets hard.
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This latest coordinated move by the group of central banks has helped to limit a global dash-for-cash that would typically be seen in times like these, where investors sell risk assets for cash to get ahead of a possible market crash.
In fact, it has actually provided a boost for certain assets, including Bitcoin (BTC), which have gained new favor in the eyes of investors amid the growing realization that the money held in banks may not be as secure as once thought.
Following the Sunday announcement from the central banks, Bitcoin price rallied 5.43% from $27,200 to a high of $28,662 in early trading on Monday, its highest price level since last June, bringing its cumulative month-to-date gains to nearly 25%. Year to date, BTC price has increased by 71.5%.
BTC/USD 1-day chart. Source: TradingView
Gold also caught a bid following the announcement from the central banks, surging 2.1% to a high of $2,014 in early trading on Monday before pulling back to support near $1,970.