Almost three months to the day (since December 11) after the Federal Reserve inaugurated its Term Auction Facility (TAF), the central bank invents a new liquidity driving mechanism calling it Term Securities Lending Facility (TSLF) through it which it lends $200bn to its primary dealers.
Recall, says Ashraf Laidi, chief forex strategist at CMC Markets US, in a Tuesday note, that the Fed had just extended its lending facilities to 28 days after Friday’s dismal labour report. Tuesday’s latest co-ordinated interventions by the Federal Reserve, Bank of Canada, Bank of England, Bank of Japan and bank of Swiss National bank have delivered what Laidi calls “the short-term equivalent of an inter-meeting Fed cut via the impact on overall market liquidity and resulting increase in risk appetite”.
The dollar soared across the board as markets eliminated all chances of a Fed intermeeting rate cut, thereby, sparing the currency from further yield erosion from the US central bank. This means the most likely outcome is for the Federal Reserve to stick to a 50bp rate cut at its scheduled FOMC meeting next Tuesday. Nonetheless, Laidi says, in light of the increased chances of a US recession, broadening losses in equities and the strong fundamentals in the eurozone, Tuesday’s dollar rebound will be short-lived largely against the euro and the yen.
The short-term EUR/USD outlook, in Laidi’s view, sees downside extending towards $1.5260, followed by 1.5220, at which point, “expect renewed gains in the pair ahead of the Fed’s anticipated 50bp rate cut”. The upside is seen extending towards $1.5340, followed by the $1.5390-95 region, he says.
Don’t compare the impact of Tuesday’s central bank actions to an interest-rate cut, he adds.
Remember December 12th and March 7th? Just a few days after Friday’s post-labor report announcement from the Fed to raise the amount of liquidity in its TAF auctions to $100bn to “address heightened liquidity pressures in term funding markets”, the Fed steps in with a fresh announcement to increase lending by $200bn.
Separately, the ECB has issued a statement indicating it is willing to provide extra dollar liquidity, as it did on January 22 and December 12. Indeed, December 12 was the day to remember, which triggered the US central bank to step inaugurate its TAF after it had disappointed markets the preceding day (December 11) with only a 25bp rate cut.
Despite the Fed’s announcement and the ECB’s injection of more than $500bn in liquidity, the resulting stock rally lasted no more than one day, Laidi notes. Recent history shows that markets are more likely to make a prolonged rally following interest rate cuts – “which aim at lowering the benchmark target of the cost for loanable overnight funds, rather than following term lending facilities that aim at preventing liquidity from falling further”.
These liquidity-injection operations may help stabilise the normal functioning of credit markets but will neither soften the loosening in the deteriorating jobs market nor lower the increasing burden on consumers’ falling purchasing power in light of rising oil, and negative real average hourly earnings growth.