Bitcoin and gold rise as central banks coordinate efforts to stop 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 the US dollar flowing through the global financial system amid the biggest banking crisis since 2008.

The move by the central banks was announced via a press release on Sunday, which said it would improve “the supply of liquidity via the standing US dollar liquidity swap arrangements.” Swap lines are an agreement between two central banks to exchange currency.

“To improve the effectiveness of the swap lines in providing US dollar funding, the central banks currently offering US dollar operations have agreed to increase the frequency of the 7-day maturity from weekly to daily,” the release said. “These daily operations will begin on Monday, March 20, 2023, and will continue until at least the end of April.”

The swap line system was established to serve as a liquidity backstop that can help ease the strain on global funding markets, helping to mitigate the effects of the strain on the supply of credit to households and businesses. The Federal Reserve previously used 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 began operations on Monday and will continue to operate until April 30 at the earliest, with the potential to remain open longer. The ultimate goal of the transition to daily 7-day maturity operations is to help mitigate exchange rate volatility and avoid strains on the credit supply.

The coordinated response follows the recent struggles of several prominent banks, including Silicon Valley Bank and Signature Bank in the US, as well as Credit Suisse in Europe, which has now been taken over by UBS and the Swiss National Bank.

While a number of factors have contributed to the unfolding banking contagion, the main culprit is the Federal Reserve and its aggressive rate hikes, done to curb inflation. The Fed has raised borrowing costs by 450 basis points since March 2022, which has hit asset markets hard.

This latest coordinated move by the group of central banks has helped 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 given a boost to certain assets, including Bitcoin (BTC), which has found new favor in the eyes of investors amid the growing realization that money held in banks may not be as safe as once thought.

Following Sunday’s announcement from the central banks, Bitcoin price rose 5.43% from $27,200 to a high of $28,662 in early trading on Monday, the highest price level since last June, bringing its cumulative month-to-date gain to nearly 25 %. So far this year, the BTC price has increased by 71.5%.

BTC/USD 1-Day Chart. Source: TradingView

Gold also caught a bid after the central banks’ announcement, rising 2.1% to a high of $2,014 in early trade on Monday before retreating to support near $1,970.