Forex Investment and Currency Trading

On Wednesday global equity markets rose strongly, with the S&P500 gaining 4.24% and the Dow Jones up 3.51%. Lehman Bros and Goldman Sachs both reported better than expected Q1 earnings. Financial stocks were the top eight gainers on the S&P500, and the top 13 gainers rose at double-digit rates for the day. European markets closed up, led by financial stocks and mining companies. The FTSE gained 3.53%. The Nikkei gained 1.50% and Hang Seng 1.42%, whilst the Shanghai SE Composite lost 3.96% after Chinese Premier Wen Jiabao pledged action to fight inflation and Central Bank Governor Xiaochuan said there was room to tighten monetary policy.

After Tuesday’s FOMC meeting (see below), the USD gained against the EUR and JPY but fell against GBP after UK inflation continued to rise and the market reduced its bets the BoE will cut interest rates at the next meeting in Apr. Two-year UST yields rose 20bps to 1.56%, and ten-year UST yields rose 12bps to 3.45%. The 2s-10s spread fell 9bps to 188bps.

On Tuesday the FOMC cut the fed funds rate and the discount rate by 75bps to 2.25% and 2.50%, respectively. That was in line with our view though the market was pricing in a high probability of a 100bps cut. Similar to the 30 Jan meeting, the post-meeting statement cited “downside risks to growth” and said the FOMC would act in a “timely manner”. The statement acknowledged the elevated inflation rates with more emphasis than in Jan, but the Fed’s immediate focus remains on easing the logjam in the financial markets. Only once some confidence is resolved, the Fed can turn its attention elsewhere if needed.

The vote of the FOMC meeting was 8-2 as Philly Fed Pres. Plosser and Dallas Fed Pres. Fisher voting for (unspecified) less aggressive action. The next FOMC meeting is Apr 30. The vote to cut the discount rate by 75bps to 2.50% was unanimous. This follows Sunday’s lowering by 25bps aimed to continue addressing the credit crunch that has seen inter-bank liquity dry up and O/N Libor hitting a 113 bps premium over Fed’s target rate last Friday.