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Main » 2020 » March » 16 » Dollar chosen weapon! The Fed surprised financial markets aggressive reduction in the federal funds rate
Dollar chosen weapon! The Fed surprised financial markets aggressive reduction in the federal funds rate


When instead of the expected grenade instruct gun at you, it's time to go where the attacker needs. However, not the fact that the shot will be exact. In addition, more powerful weapons indicates that the opponent is afraid. Reducing the federal funds rate by 1 pp to 0.25% at the extraordinary meeting of the FOMC was to instruct the financial markets are on the right path, however, and stocks and Treasury yields have reacted the same way as after the unexpected monetary expansion March 3. Fall. 



The Fed decided to take the unprecedented step of not only reducing borrowing costs by a greater amount than expected her to the futures market, but also announced the purchase of Treasuries by $ 500 billion and mortgage bonds for $ 200 billion, reducing the amount of deductions to mandatory reserve fund to zero for 90 days, as well as running the currency swaps with central banks 5 th. We can only guess what caused this sudden and aggressive easing of monetary policy. Whether a sharp deterioration in financial conditions, whether pessimistic forecasts for US GDP, or criticism of Donald Trump. 


The dynamics of financial conditions 


Source: Bloomberg.

Just one day before the historic decision FOMC US president erupted angry tirade. He said that the US administration for the central bank is forced to do his job, which may replace the chairman, and the Fed is simply obliged to bring the rate down to levels that take place in other countries. After the Federal Reserve stunned investors massive monetary stimulus, the White House said he was surprised and that he likes to be surprised. 

The reaction of the markets convinced that the regulator's decision is due to its concerns about the fate of the US economy. Closure of enterprises in the weeks and months ahead will lead to massive bankruptcies and unemployment. The recession is close as never before, Goldman Sachs predicts that in the first quarter US gross domestic product will not grow, and in the second shrink immediately by 5%, JP Morgan expects the sagging economy by 2% in January-March and by 3% in April-June. 

Fall S & P 500 and Treasury yields was the result of not only the Fed's fears, but also strengthening speculation that the central bank from the current situation, there is little independent. Save the economy can only be a large-scale fiscal stimulus of $ 400-500 billion. 


The dynamics of Treasuries yields


Source: Bloomberg.


As for the US dollar, Morgan Stanley recommends selling it. In particular against the euro from Target for $ 1.16 and a wide stop order at $ 1.08 due to the high volatility on Forex. CIBC noted that the combination of a sharp decline in rates and expansion of the Fed's balance sheet by approximately 16% - bad news for the greenback. Toronto Dominion Bank notes that the aggressive monetary expansion and currency swaps reduce the cost of expenses for purchase of dollar liquidity, which is the reason for buying EUR / USD. In my opinion, it shocked the market, and while it digests the information, it makes sense for investors to sit on the sidelines. Only a couple of quotes out beyond the range of 1,105-1,122 consolidation can give investors a hint about its medium-term outlook.


Analyst LiteForex today



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