Australian dollar rebounds on Fed’s QE infinity

See the latest Australian dollar analysis here:

Macro Afternoon

DXY softed a little last night:

The Australian dollar firmed:

Gold jumped:

Oil too:

Not metals:

Nor miners:

Or EM stocks:

Junk lifted a little:

As did bonds:

Stocks fell anyway:

Westpac has the wrap:

Event Wrap

Coronavirus update: Latest WHO data, via the Situation Reports, shows 292,142 cases confirmed as at 22 March, with 26,069 new cases. The daily increase in cases continues to rise, the largest increases coming from Iran, Italy, Spain, France, Germany, Switzerland, USA and UK. Unofficial sources such as Worldometer show cases confirmed to date total 372,253 as at 23 March, with 34,823 new cases.

The US Federal Reserve announced an unprecedented set of initiatives designed at supporting the interest rate markets and businesses, including open-ended purchases of  treasury, agency and mortgage backed securities, a new USD300bn fund to provide consumer and business credit flow , two facilities for large employers, support for the corporate bond market, Term Asset-Backed Security Loans to support consumer and business credit, and business lending programmes to support SMEs.

Regarding US Government rescue initiatives, disputes between Democrats and Republicans persist, the parties presenting opposing bills.

Event Outlook

Several preliminary readings of the March Markit PMIs are due over the day. This includes the manufacturing and services PMIs for Japan, the Euro Area, Germany, the UK and the US. The market will watch these indices closely as a barometer for conditions amidst the pandemic; sharp contractions are anticipated across the board.

US February new home sales are now dated, but expected to print at 750k. This is ahead of a likely pullback in demand as COVID-19 accelerates. March Richmond Fed index is expected to fall to -10 as US industry comes under significant pressure from the contagion.

The Fed finally reached to place the world needs it to be:

Federal Reserve announces extensive new measures to support the economy

The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time. The coronavirus pandemic is causing tremendous hardship across the United States and around the world. Our nation’s first priority is to care for those afflicted and to limit the further spread of the virus. While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.

The Federal Reserve’s role is guided by its mandate from Congress to promote maximum employment and stable prices, along with its responsibilities to promote the stability of the financial system. In support of these goals, the Federal Reserve is using its full range of authorities to provide powerful support for the flow of credit to American families and businesses. These actions include:

  • Support for critical market functioning. The Federal Open Market Committee (FOMC) will purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.
  • The FOMC had previously announced it would purchase at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities. In addition, the FOMC will include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases.
  • Supporting the flow of credit to employers, consumers, and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing. The Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide $30 billion in equity to these facilities.
  • Establishment of two facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.
  • Establishment of a third facility, the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.
  • Facilitating the flow of credit to municipalities by expanding the Money Market Mutual Fund Liquidity Facility (MMLF) to include a wider range of securities, including municipal variable rate demand notes (VRDNs) and bank certificates of deposit.
  • Facilitating the flow of credit to municipalities by expanding the Commercial Paper Funding Facility (CPFF) to include high-quality, tax-exempt commercial paper as eligible securities. In addition, the pricing of the facility has been reduced.

In addition to the steps above, the Federal Reserve expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.

The PMCCF will allow companies access to credit so that they are better able to maintain business operations and capacity during the period of dislocations related to the pandemic. This facility is open to investment grade companies and will provide bridge financing of four years. Borrowers may elect to defer interest and principal payments during the first six months of the loan, extendable at the Federal Reserve’s discretion, in order to have additional cash on hand that can be used to pay employees and suppliers. The Federal Reserve will finance a special purpose vehicle (SPV) to make loans from the PMCCF to companies. The Treasury, using the ESF, will make an equity investment in the SPV.

The SMCCF will purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds. Treasury, using the ESF, will make an equity investment in the SPV established by the Federal Reserve for this facility.

Under the TALF, the Federal Reserve will lend on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. Treasury, using the ESF, will also make an equity investment in the SPV established by the Federal Reserve for this facility. The TALF, PMCCF and SMCCF are established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.

These actions augment the measures taken by the Federal Reserve over the past week to support the flow of credit to households and businesses. These include:

  • The establishment of the CPFF, the MMLF, and the Primary Dealer Credit Facility;
  • The expansion of central bank liquidity swap lines;
  • Steps to enhance the availability and ease terms for borrowing at the discount window;
  • The elimination of reserve requirements;
  • Guidance encouraging banks to be flexible with customers experiencing financial challenges related to the coronavirus and to utilize their liquidity and capital buffers in doing so;
  • Statements encouraging the use of daylight credit at the Federal Reserve.

Taken together, these actions will provide support to a wide range of markets and institutions, thereby supporting the flow of credit in the economy.

The Federal Reserve will continue to use it full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.

It is now lender and buyer of last resort to ALL credit.

This is not the end of the crisis. Ahead lies the decimation of the US by the virus. A more severe shutdown there and in Europe. Mass corporate and personal bankruptices.  And, finally, mass bank nationalisations.

But it is the end of the beginning. Now the Fed can backstop it all.

Normally we would expect risk assets and the Australian dollar to get a good run from this but the crisis is moving so fast, and the economic damage is so severe and steep, that I do not think that it will get far before heading lower.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. agree. RBA will be forced to do something similar so aud will have to fall. especially when people realise we don’t make stuff anymore.

    • Do something similar?

      Similar to the Fed?

      With respect, you are dreaming.

      What they need to do is to block the unproductive, predatory capital inflows that Fed QE (and the other big Central Banks) is driving towards Australia.

      • i did not say what they need or should I am predicting what they will. RBA is reactionary and follows what FED does.

    • Dominic
      Question and let me know if I’ve got the Bull by the tail. Given the RBA Swap arrangement with the Fed, doe that effectively, for the time being, give us virtual USD Reserve Currency status?

      • Not really flawse — it effectively means that financial institutions in this country can access US Dollar funding should they need it. I don’t know if there are any limits this time but what it does mean that any entity here in straya who needs it can get it without having to go into the market and bid up scarce USD funding. These swap lines are a pressure release valve for Dollar funding markets.

        The reason these pressures exist is because financial intermediaries across the globe make USD loans (for say, 1, 2 or 3 yrs for example) but they fund themselves in the wholesale market i.e. they match the loan they make by borrowing and re-borrowing dollars on an overnight, weekly, monthly or 3 month basis — until the loan is effectively repaid. This is how to extract the most profit from lending.

        If a bank made a loan for 1yr and borrowed the money for 1yr (in order to match the maturity of that loan) they could really only hope to make a bit on the credit spread i.e. the difference between the bank’s credit spread and the borrower’s. By borrowing short-term and lending for a longer term they make money on the yield curve too (assuming a ‘normal’ curve). Hopefully that make sense – if not I can give a practical example which will explain it more clearly.

        This practice of borrowing short and lending long is actually controversial because it creates a maturity mismatch which exposes these institutions to almost instant insolvency should they be shut out of funding markets — this is what brought Lehman down.

        • Thanks Dominic
          I understood all that but I hope a few others take the trouble of reading your post. Banks don’t just CREATE money here! I prefer to look at it as that Banks fulfill the demand for money – by borrowing overseas and lending here- essentially! I guess my question was really around whether there are any limits on it – which nobody is going to tell s.

  2. The Fed is delusional if they think they can prop up all financial assets here without losing all credibility. If it was just a financial panic yes, but there is a real world depression coming afterwards. This is just the start and the figures coming down the pike are going to be other worldly.

    They have to either let the bad half of the debt default or revalue the US dollar in relation to gold like they did in the last depression. Then the accounts might be halfway believable for a while. I am one of those deluded fools who think Fort Knox has plenty of gold, just mostly leased out…….but leases are just promises.

    They really don’t want any sort of reset which is what they are courting here…….now way they maintain control of the streets in the US if that happens.

    https://surplusenergyeconomics.wordpress.com/2020/03/22/168-polly-and-the-sandwich-man/

    UBI now is the only way……..no-one wants your credit any more they need an income.

  3. I’ve been waiting for a crash in Australia since I first started reading MB, now seeing the lines outside Centrelink, and the many more that will lose their job, it’s actually pretty sad, and this isn’t the worst?
    I have advised a mate who works for Qantas (his wife Virgin) to sell an IP, although probably too late

    • If you’re sad, even a little bit, you’re too soft. Harden up or keep it to yourself ….or we’ll have to cut you off.

    • she won’t stay virgin for long if they fall badly behind with payments. she may have to find alternative work.

    • Jason – 2013, was about to buy an IP, HnH told me he’s got a bridge he can sell me, Reusa told me to not listen to anyone on here and jump right in!! I joined after that…..I’ll sign up again next pay

        • C.M.BurnsMEMBER

          and it’s about to go through a halving cycle.
          ASX at 2012 figures and still falling. Property will follow suit, soon enough

        • Please don’t, I have been through this with my wife, all I had until now was “it’s coming, you will see”…at least now I got credibility with super allocation, I don’t talk property to my mates.

  4. Ronin8317MEMBER

    Next step : US government will buy stocks directly via borrowing from the Fed. Look at Boeing for example : their bailout package will cost more than their market cap, so it is more efficient for the US government to buy them outright.

    Ever company on the Dow Jones with exception of Apple will become a State Owned Enterprise.

    • but but free markets and capitalism..
      just to be clear I do believe in capitalism but it’s not capitalism what we have right now.

    • Ronin8317MEMBER

      If you shutdown now, in 2 weeks you’ll see a decrease in number of cases, in 4 weeks it’ll be under control. Then you can gradually reopen. That’s how they did it in China to fix Wuhan.

      The shutdown for 6 month is a scientific paper written by a hack with no real life experience.

      • @Ronin – Australia will never implement the types of controls that China did when it comes to people movement…I think in our case 4 weeks then under control is unlikely. I can’t see us taking temperatures before getting on public transport….

        We’ll be a slow and incompetent grind over the long term.

  5. Even with 2m Aussie unemployed they will still say there are skill shortages and import foreign workers. The media will do their bit and gas light the public.

    • Well if 2 million people are out work how do you think they will be able to get their Centrelink payments. We need to import more skilled workers at Centrelink to hand out the money,

    • The intellectual city centre boys and girls sure ain’t leavin their facebook and twitter to go fruit pickin no ways! It wold be uncomfortable.

  6. Hang on, if it goes down 10 pips it’s “smashed” but going up 120 pips is “firming”??