Forex Investment and Currency Trading

After several weeks of madness, we finally saw some relief last week. The S&P was up 10.50%. 3M Libor came down 50bp. Non-financial US IG spreads declined 15bp (to 132bp). US HY spreads declined 70bp (to 1090bp). On the policy front, we have seen broad-based policy easing globally, including from key EM countries, with India’s decision to cut rates by 50bp (to 7.50%) and Korea’s fiscal package totalling 1.5% of GDP. In addition, we have seen the Fed move not only to lower the Fed Funds rate to 1% but also take unusual measures to ‘get the Dollars to where they are needed’. Domestically, the CPFF facility has online last week and helped see an increase in the outstanding amount of Commercial Paper issuance for the first time in many weeks. Internationally, the Fed expanded its so-called swap lines to four key EM central banks (Korea, Singapore, Brazil and Mexico) in an effort to easy dollar funding strains globally.

This week sees additional important monetary policy announcements and key data in the US. The BoE and the ECB are expected to cut rates by 100bp and 50bp respectively on Thursday. Before that, market expects the RBA to cut by 50bp. 

In other policy news, headlines over the weekend suggested that government was planning a €50 billion stimulus package for the German economy. However, as Dirk Schumacher noted in this mornings comment, it seems that actual government spending will be a lot smaller and the €50 billion figure refers to the forecasted investment spending triggered by the fiscal stimulus. There are also plans for loan guarantees and ‘liquidity assistance’ that would induce investments of another €20
billion, though it is not clear how big these measures are. All this, assuming these reports are correct, sound like a lot of wish-full thinking from the government side. It is hard to believe that the fiscal multiplier is close to 10. The cabinet will approve the fiscal package on Wednesday.