Intraday Market Thoughts

Will Fed Going Nuclear Hurt USD?

by Adam Button
Mar 23, 2020 23:47

Finally, the Federal Reserve went way beyond anything it had done previously in terms of asset purchases and yields across the US curve are nearing zero. The kneejerk reaction was to sell the US dollar but that move faded and that may continue. Congress still failing to reach a deal, forcing stocks lower until the last half hour of cash and late futures trading.The UK announced a full lockdown with cable near 35-year lows. A new non-FX non-Indices Premium trade was issued today.

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Will Fed Going Nuclear Hurt USD? - Gold Silver Mar 24 2020 (Chart 1)

13 is the number of Fed stimulus programs and actions, created so far this month--with Monday's awe-inspiring move. It included unlimited QE in government-backed debt at $125B per week, corporate bond buys, a TALF that includes credit card debt and a promise to create a 'main street lending program'.

The shock from the program initially weighed on the US dollar, but over time the effect faded. A risk in evaluating this crisis is looking at it from a US or European perspective. It's truly a global event. The moves will ease funding stress, but by underwriting credit risk, the Fed also makes USD-assets more attractive. Contrast that with emerging and developed market central banks that don't have the same capability.

Even if the moves eventually help to draw a line under US equities, that will simply pull in more foreign capital and drive up the US dollar. Could the US dollar continue to hold firm despite further gold gains in the horizon?

In the UK, Boris Johnson announced a three-week complete lockdown of the country. It marks a turnaround in policy from a week ago and will mean a severe short-term hit to the economy but that may prove to be less than a crippling outbreak. Cable remains severely oversold but is trying to carve out a bottom at 1.1400. Watch that level.

Looking forward, the day ahead will feature a continued close watch on US Congress and attempts to pass a stimulus bill. The latest price tag is an astonishing $2.5 trillion, which will likely push the budget deficit above $4 trillion this year. In terms of getting it done, it's always questionable to bet money on Congress and Senate Republicans after they lost a significant amount of leverage, with 5 members in quarantine.

In terms of data, the March prelim Markit manufacturing and services numbers are out for a number of countries. Those should provide an early look at how hard shutdowns are hitting but be careful to draw any conclusions because most of the surveys will have been conducted before the full shutdowns.


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