• Coordinated efforts to rescue the global banking sector fail to boost EUR/JPY.
• European banking crisis takes a toll on EUR/JPY despite interest rate hikes.
• Narrowing yield differential with JGBs adds to EUR/JPY volatility amid banking turmoil.

EUR/JPY retraced all of its earlier gains on Monday as investors were on the back foot despite coordinated efforts to rescue the global banking sector. Over the weekend, some major central banks joined to rescue the squeeze on liquidity experienced by some commercial banks.

The Federal Reserve (Fed) reopened the swap line for needy central banks to bid the US Dollar on short-term maturity. This new development initially prompted immunity from the safe-haven Japanese Yen. However, as the session progressed, we saw a U-turn in sentiment and a recovery in safe-haven demand.

The US banking turmoil is reverberating within Europe. It all started with Credit Suisse's financial stability failure, despite the Swiss National Bank's intervention. Things do not look to be settling down, and ultimately the Swiss authority has had to support UBS to take over Credit Suisse.

Last week, the European Central Bank raised interest rates by 50 basis points (bps) despite the problems with Credit Suisse. The rise could act as a double whammy amid the banking crisis. Citing earlier reports, two European banks are under scrutiny amid possible contagion rumors. The cultivation of such a scenario may impact and force central banks to rethink their rate-hiking path. This is likely to have a more negative impact on the Euro than the Yen.

On the other hand, this banking crisis is weighing on global yields. Therefore, the yield differential with Japanese Government Bond yields (JGB) is narrowing, which is one-factor inducing volatility in the Japanese Yen.

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