Forex Investment and Currency Trading

1. Jan 22: FOMC decided to lower its target for the federal funds rate 75 b.p.s in an unscheduled meeting.
2. Jan 28: Fed offers $30bn through its Term Auction Facility (TAF). There was reduced demand at the auction.
3. Feb 8: Fed announced that it will offer $30bln in 28-day credit through its TAF on 11th Feb.
4. Feb 22: Fed announced that it will offer $30bln through its TAF.
5. Mar 7: Fed decided to add $200bn in liquidity in combined TAF and OMO, $140bn more than previously planned. The Fed was clear about increasing operations if conditions warrant.
6. Mar 10: Fed announced that it would offer $50bln in 28-day credit through its TAF (as expected)
7. Mar 11: Fed announced the TSLF. Under this, the Fed would lend $200bn of Treasury securities to primary dealers. Fed also announced an expansion of TAF from the ECB and the SNB to $30bn and $6bn respectively.
8. Mar 16: Fed cut the discount rate by 25b.p.s in an unscheduled meeting and extended discount window loan terms to 90 days from 30. Also introduced the Primary Dealer Credit Facility (PDCF).
9. Mar 17: JP Morgan “rescue” Bear Sterns before Asian markets open.
10. Mar 18: FOMC decided to lower its target for the federal funds rate 75 b.p.s. Market expected 100 b.p.s.
11. Mar 28: The Fed announced that it will conduct two auctions through its TAF in April. It will offer $50bln in each.
12. Apr 1: UBS writes down $19bn in ailing assets related to subprime mortgages.

So what do we see?

1. An extremely busy FED. They have used unprecedented measures through the various market tools (discount window, setting the Fed Funds target rate, TAF, OMO’s, TSLF, PDCF) to stabilise the financial markets, provide the necessary liquidity and stopping the crisis from spinning even further out of control.

2. On every Fed action, the stock market rallied impressively. The Dow Jones Industrials did not re-test the January low - when the Fed cut rates by 75b.p.s

3. The market rallies on a USD19bn write-down from a major international investment bank? What is this telling us? Is there a shift in sentiment taking place following the events listed above? Remember, stocks were not at the core of the crisis. This is a mortgage, credit and banking crisis, not a stock market crisis. That is why it was slow to “catch up” on the way down in the summer and autumn of 2007. That is also why it is likely to be the first market to progress out of the crisis. With this in mind, if you believe that the dramatic financial market events of the past three months are unlikely to be repeated in this downturn then it is very likely that those lows in the stock market will not be seen anytime soon.

More importantly the interest rate cuts and the Fed’s market operations has meant that 2 year yield are now only inverted by -29 b.p.s to Fed funds from and extreme of close to -200 b.p.s in January ‘08. With the ST outlook for 2 year yields to rise further, we are now close to a more normalised environment where 2 year yields could be above fed funds for the first time since June 2006.

Let’s not underrate the Fed’s actions since January and let’s not turn a blind eye to the market’s reaction.