APAC morning brief: Japanese yen rise as First Republic Bank woes spook markets

Risk aversion brings in demand for the US dollar and Japanese yen

The anti-risk US dollar and Japanese yen outperformed their major counterparts on Tuesday amid a spike in financial market volatility as investors turned risk-averse and sought shelter.

On Wall Street, the Dow Jones, S&P 500 and Nasdaq Composite sank -1%, -1.6%, and -1.9%, respectively. The VIX market ‘fear gauge’ surged 11.08%.

Further gains might hint at breaking a stock sector diversification strategy.

Declines on Wall Street accelerated shortly in the aftermath of an earnings report from First Republic Bank (FRC). While beating expectations, the troubled regional bank reported deposits plunging 36% y/y. To help shore up assets, FRC announced that it is exploring a $100 billion asset sale. Still, investors did not take this news kindly, punishing the stock as the share price plunged almost 50%.

Virtually everything in markets over the past 24 hours screamed a classic risk-averse scenario.

Traders flocked to the safety of Treasuries, bidding up prices as yields plunged. This dynamic held up gold prices despite a surging US dollar. In the currency space, the sentiment-linked Australian and New Zealand dollars underperformed against their major counterparts.

There was an increase in dovish Federal Reserve monetary policy expectations, but the interest-rate-sensitive tech sector plunged. In fact, a lot of the market reaction today was reminiscent of the early phase of a recession. In a somewhat upside twist, earnings from Microsoft and Alphabet surprised higher, alleviating volatility after the close.

Where does this leave the US dollar and sentiment going forward?

Risk aversion may continue brewing during Wednesday’s Asia-Pacific trading session.

That may pressure regional indices, such as the Nikkei 225 and ASX 200. Such an outcome might continue supporting the US dollar and to a certain extent, the Japanese yen in the near term. AUD/USD will be awaiting an Australian CPI report.

US dollar technical analysis

The DXY dollar Index left behind another Bullish Engulfing candlestick pattern just above the critical 100.82 – 101.29 support zone. Once again, this continues to reinforce the February low, making this range a pivotal point for the US dollar.

Breaking higher could open the door to a bullish reversal. If not, turning lower opens the door to extending losses since late last year.

DXY daily chart

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