Forex Investment and Currency Trading

Fed to buy $300 bln of long-term Treasuries and an additional $750 bln of of agency MBS in order to keep long-term yield very low.  10 year Treasury yields are  down 45bps from 3.00% to 2.55% and the USD has fallen by 250 pts vs the EUR.  Watch for a lot more USD weakness in coming days. 

The FED finally shoots the bullet of full on quantitative easing by promising to buy $300 bn of US Treasuries over the next 6 months.  They also plan on extending more buying of MBS and highlight the TALF.  The trouble with the move is the unintended consequence of the move on the USD.  The risk now is that the USD weakness erodes some confidence in other assets in the US.  Time will tell.  The next set of US Treasury Supply will be important.  Trades that will fall out of the FED – 1) Buying Gold; 2) Selling USD – particularly against other reserve currencies EUR, GBP, CHF, JPY; 3) Buying real assets – commodities and equities related to them.

Add to USD shorts - While the broad range of alternative policy initiatives has often made interpreting the impact on FX difficult, the implications of today’s Fed decision are unambiguous. USD should weaken in the wake of lower US yields. No doubt the success of the BoE’s quantitative easing which entailed significant Gilt purchases fed some expectation for US steps in the same direction. Still, the speed and scope with which the FOMC acted is likely to surprise the market and we would anticipate underperformance from US yields to erode support for USD.  In purchasing up to $300bn in Treasuries over the next six-months, the relative scope of the Fed’s actions roughly mirrors those seen in the UK which have already undermined GBP significantly. We have long argued that US policy would eventually drive sustained USD depreciation and today’s Fed action could signal that the next leg lower is forthcoming. Even as USD is trading towards the weak end of recent ranges, this means that risk-return favors staying short. With equities enjoying a significant knee-jerk rally, it is clear that the Fed actions are providing a further boost to risk appetite. This should be a boon to USD short positions vs. EM and commodity currencies.

Just before the FOMC statement:
EUR – 1.3115
JPY – 98.15
AUD - .6595
SPX – 778
US2Y – 0.964%
US10Y – 2.943%
Gold – 889.8
Oil – 47.82

Just after the FOMC statement:
EUR – 1.3335 – high has been 1.3353
JPY – 96.85- low has been 96.15
AUD - .6710 – high has been .6720
SPX - 798
US2Y – 0.919%
US10Y – 2.652%
Gold – 922
Oil – 48.72

STATEMENT FROM MARCH 17-18: FOMC moves to buy US Treasuries not expected; Statement highlights downside risks. Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S.exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual  resumption of sustainable economic growth.  In light of  increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. In these circumstances, the  Federal Reserve will employ all available  tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant  exceptionally low levels of the federal funds rate for an extended period. To  provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet  further by purchasing up to an additional $750 billion of agency mortgage-backed  securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve  conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The  Federal Reserve has launched the Term Asset Backed Securities Loan Facility to  facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.

STATEMENT FROM JAN 27-28: FOMC holds rates at a range of 0% - 0.25% - as expected; Statement highlights downside risks.  Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant. In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee’s policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve’s balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.