Greenback Plunges After Fed’s Massive Move

* The dollar plunged on Wednesday after the Federal Reserve said it will use its balance sheet to further ease monetary policy. The Fed said it will buy $300 billion in Treasury securities and expand its purchase of mortgage and agency debt. Bond prices rocketed; 10-year yields fell 50 basis points, the most since 1962. US stocks measured by the S & P 500 index rose 2.1%, extending its rally since last week’s 12-year low to 17%. US consumer prices rose, decreasing the risk of a 30s-style deflation. Contrary to the 30s, the Fed has been able to expand money supply and today’s FOMC decision indicates Fed Chairman Ben Bernanke will continue to counter deflationary forces. The Fed’s bold move reduces risk aversion that has supported the dollar. The USD/JPY broke support from its upward sloping trading band. The GBP/USD was unable to penetrate important resistance. The USD/CAD broke its diagonal support. The Australian dollar rose for a seventh consecutive day. The USD/CHF fell, erasing all recent gains due to the Swiss National Bank’s decision to intervene to depreciate the Swiss Franc. The technical damage to the greenback indicates that the buck will weaken further as the risk of deflation and further economic contraction has significantly been reduced.

* Following the Fed’s announcement, the EUR/USD shot through the 1.31 resistance and rallied to the 1.35 resistance, the highest level since January. The pair surged on improved risk appetite as the Fed’s move will make the debt deflation and deleveraging a less painful process. The European Central Bank’s more hawkish stance is also making the pair attractive as longer-term inflation risks increase. Gold prices rose over 5%. The EUR/USD has made a double bottom in the 1.24-1.25 area and broken the resistance from the recent downtrend. However, the pair is getting overbought, indicating a possible consolidation before moving higher. There are support in the 1.30-area and resistance in the 1.35-area.



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Financial and Economic News and Comments

US & Canada

* US consumer prices rose a slightly more-than-expected 0.4% m/m in February after a 0.3% m/m increase in January, according to the Labor Department. The CPI increased 0.2% y/y. Energy prices, which rose 3.3% m/m, accounted for most of the February CPI increase. The core CPI was up 0.2% m/m in February after increasing 0.2% m/m in January. The core CPI climbed 1.8% y/y. Real average hourly earnings – the cash earnings of production workers, adjusted for inflation – declined 0.2% m/m in February but rose 4.1% y/y.

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* The US current account deficit declined $48.5 billion in Q4 2008 to -$132.8 billion or 3.7% of GDP, the smallest deficit since 2001, data from the Commerce Department showed.

* The Federal Reserve maintained the target range for the federal funds rate at 0 to 0.25%, as expected, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds. Wednesday’s Fed announcement will increase the size of its balance sheet by another $1,150 billion to about $3,000 billion. The Fed statement read: “To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.”

* Canada’s wholesale sales fell 4.2% m/m in January to C$41.1 billion ($32.3 billion), the fourth consecutive monthly drop and the lowest since November 2006, following December’s downwardly revised 3.1% m/m decline, data from Statistics Canada showed.

Europe

* UK jobless claims rose for a 13th month in February, rising a more-than-expected 138,400 to 1.39 million, following January’s upwardly revised increase of 93,500, according to the Office for National Statistics. The claimant count rate rose to 4.3% in February from an upwardly revised 3.9% in January. The UK unemployment rate based on International Labor Organization standards rose to 6.5% in the three month through January from 6.3% in the previous period. In the three months through January, wage growth decelerated to a record low of 1.8% from a downwardly revised 3.1%, while wage growth excluding bonuses slowed to 3.5% from 3.6%.

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* The Bank of England’s Monetary Policy Committee voted unanimously to cut its benchmark interest rate to a record low 0.50% and also purchase as much as £75 billion in assets through its asset purchase facility, according to minutes of the March 4-5 MPC meeting, released today.

Asia-Pacific

* The Bank of Japan kept its benchmark interest rate unchanged at 0.10%, as forecast, stating that financial conditions have remained tight leading to further deterioration in economic conditions. Inflation has moderated and will likely become negative as slackness in both demand and supply conditions increase, the central bank said. As a consequence, the BOJ will increase its monthly purchases of government bonds to ¥1.8 trillion ($18.3 billion) from ¥1.4 trillion previously announced; “thereby facilitating smooth money market operations.”

* The Japanese leading economic index was at 77.2 in January, up from a preliminary estimate 77.1 but down from December’s 79.4, according to the Cabinet Office’s Economic and Social Research Institute. The coincident index was confirmed at 89.6, down from December’s 92.2. The figures indicate continued deterioration in the Japanese economy.

* The Westpac Australian leading economic index declined 0.2% m/m in January after falling 0.4% m/m in December, Westpac Banking Corp. and the Melbourne Institute reported. The LEI shrank 3.1% y/y. The figures indicate contracting economic activity, adding to evidence Australia is in a recession.

FX Strategy Update


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Источник: Hans Nilsson

18.03.2009