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We saw some major data announcements this week and the catalyst was the news around the U.S. debt ceiling.
The House passed a bill to increase the debt ceiling by $1.5 trillion last month, but progress has been slow between President Biden, House Speaker Kevin McCarthy, and the parties involved.
Concerns arise as the first-ever U.S. debt default could potentially occur as early as June 1st, with plans for new talks being set. Republicans insist on spending cuts, while Biden and Democrats argue for raising the debt ceiling without preconditions.
The future progression of this issue remains uncertain in the weeks ahead.
With so much going on, let’s explore the role of SWIFT in global debt levels and its indirect impact on the Forex markets.
What is SWIFT?
SWIFT is the world’s leading provider of secure financial messaging services. Based in Brussels, Belgium, it was founded in 1973 by 239 banks from 15 countries as a cooperative to create a secure financial messaging system.
Now SWIFT is a critical component of the global financial system. It facilitates cross-border payments, foreign exchange transactions, and other financial operations.
It helps trillions of dollars of cross-border payments between over 11,000 financial institutions in more than 200 countries.
All major banks transfer all major currencies using the SWIFT message system and cutting a nation off from the system is like taking away its oxygen.
Each member on the SWIFT network is assigned a unique code that is either 8 or 11 alphanumeric characters long.
So, banks that are on the SWIFT platform could facilitate cross-border and cross-currency interbank transactions using these codes. There are costs when making a SWIFT transfer to access SWIFTNet and a small fixed fee for messages sent.
Who Governs SWIFT?
SWIFT is overseen by the G-10 central banks and the European Central Bank, with its lead overseer being the National Bank of Belgium. In 2012, the Swift Oversight Forum was established, in which the G-10 central banks are joined by other central banks from major economies.
Global Debt Levels & SWIFT
Global debt levels and SWIFT transactions can influence each other since many central banks and nations govern it and there are many nations involved.
The debt levels of countries involved in SWIFT have been subject to significant fluctuations over the years. But let’s talk about the recent past…
In 2020, the pandemic led to a significant increase in government debt levels in many countries around the world.
One of the simple reasons why we got here is the easy money that was flushed across economies by central banks with low interest rates and stimulus checks.
As we know, high levels of debt can lead to financial instability, inflation, and other economic problems. And that’s what we witnessed a while back with the SVB saga.
You see, the Fed started hiking rates last year and took it from 0% to almost around 5% currently.
Now, raising rates to curb inflation is fine. But it can have other implications in the financial world.
Bond prices fall when interest rates rise.
And that’s what happened. As the Fed went on raising interest rates, bonds took a beating.
This had implications for major banks which invested their cash in bonds and securities.
Here’s a look how losses on these investment securities mounted in 2022:
What Comes Next?
Note that Republicans have demanded deep spending cuts in exchange for raising the debt ceiling.
However, Biden and Democrats maintain that the limit should be raised without preconditions.
It remains to be seen how this progresses in the coming weeks.
Traders and investors should note that higher debt can lead to increased inflation, as the government may be forced to print more money to pay off its debts.
Increased inflation could also mean decreased purchasing power for consumers and lower budgets and muted growth outlook from businesses.
The above ongoing changes can potentially lead to increased market volatility. And this could be an exciting time to trade any market trends!
Click HERE to find out how our pro analysts are trading this market.
Most importantly, there are worries around rising interest rates. The Fed wants to raise them to stop inflation. But doing so could also mean more troubles ahead for banks as well as the economy. So, it’s a tough choice!
As for SWIFT nations, the above developments can impact the monetary policies, sanctions, and debt levels for many economies. They will also impact the global financial ecosystem. And they all could move the Forex markets in a BIG way!
Market participants should keep in mind that the increased market movement could lure you to take fast action. We believe it’s important that you have a solid trading strategy in place and manage your downside risks.
Our pro analysts are closely monitoring changes in interest rates and debt levels in today’s market. They’re predicting a major shift for this pair in the coming days.
Click here to learn about the forecast.
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Predicted movements expected to last through the end of Q1 2023.
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