Another extremely active morning, with the initial emphasis on the RBNZ. Which cut rates by 75bp, telling the world they’re ready for QE, even though fiscal levers are considered much more important.
It followed the moves from BoC and PBoC on Friday and we will see shortly acts from the BoJ and Bank of Korea. If we don’t act they’re missing a trick.
It didn’t take a lot of time for the Fed to hit us with a kitchen sink strategy, which came at a time when we hear reports that many U.S. states were seeking to restrict access to public spaces, such as bars, restaurants, and cafes.
RBA QE Real
It wasn’t until the Aussie lunch that we saw the news that the RBA is carrying out its own government bond-buying scheme.
We’ll learn more on Thursday, so that could entail a nominal rate cut to 0.25 percent – but the devil may be in the details. So we want to know the length of the bonds being bought (probably 3-5 years maturities), the volume (probably about $60b pa), and the expected length. It’s meant to come with rock-solid forward guidance. Cash is king, so there’s going to be lots about it. It’s not hard to understand why the three-year Treasury in Australia has taken a downturn and why there are now better AUD sellers.
AUDNZD to parity?
No Real Awe From The Fed’s Shock
The Fed’s news was definitely punchy, but the timing logic was okay, and shouldn’t shock anyone.
We wanted to see activity now, not at a planned event later this week. Get ahead of the curve, because of 3 days in this sector last like a month.
What we saw can be called ‘shock and awe,’ but the response in the S&P500 futures was less than optimistic and we see another limit down the session and there were no buyers all day. It makes us think that the US cash session is going to be another shocker.
The Nikkei 225 is marginally higher in Asia while the ASX200 is having another do-over with the Aussie regulator (ASIC) issuing guidelines to limit the number of high-volume trades participants put on the market.
(Movement or lack of movement, in today’s S&P500 futures).
I think it partly addresses the question of whether Friday’s recovery was part of a bottoming cycle or a rebound on the bear market and part unwind seeing the intense pessimism – I prefer the latter now.
I think the other factor is the flow and the liquidation process… Today it feels like a fresh wave of liquidations and forced sales. It’s only when this dissipates and positioning is adequately unwound that we’ll see the market seek to construct a foundation.
Nevertheless, it’s obvious that 9 percent rallies are more suited for bear markets and what we really want to see is a major contraction of the range, implied hard-falling vols, and price action to start showing signs of accumulation.
The market’s weak response to such aggressive stimuli reeks from a market truly concerned with the healthcare system’s consequences, not just in the US, but internationally.
And they are deeply concerned about the survival of small and medium-sized enterprises (SMEs), as an influence is already being felt here.
Credit to Parts of the Market That Need it
The Fed, to their credit, had great motivation to use the ‘discount window’ for banks and depository institutions. Which they made more convincing by slashing the primary credit rate to 150bp vs 100bp for the target range of fed funds.
The Fed has also lowered the Reserve Ratio Requirement (RRR) for these financial institutions. Once again the expectation in both cases here is that these institutions are drawn to cheap capital to lend money to the economic areas that will need it most.
The Fed lowers the target level of fed funds to 0.25 percent was completely priced. With other major central banks, we have seen USD swap lines being strengthened.
That is crucial because we saw the USD ramping up last week on a tear, with demand for USDs increasing.
FX traders watched FX basis swaps and, in particular, USDJPY and EURUSD, as they were moved sharply lower, indicating strong demand for USD.
(pink USDJPY FX basis, yellow – EURUSD basis).
This would have acted as a quasi-rate hike for foreign entities holding USD assets and no central bank wants to see their currency appreciate in a race to the bottom.
It sounds like a currency battle is going on anyhow, and today the RBNZ and RBA are the winners. It seems as if EM is going to lose this one.
FX Moves On The Day
We are also watching the spread of FRA-OIS, as it has blown up lately. It’s showing greater stress on the interbank market, and the Fed needs to give some regulation, such as Term Auction and Commercial Paper Facility.
The good news is this has dropped 7bp today if we’re looking for some, but if that heads it will become even more systemic.
Good luck to all.