Risk appetite took a massive upswing yesterday after global central banks announced a surprise, coordinated decision to cut the cost of dollar liquidity swaps by 50bp – making the availability of emergency funding even cheaper and thereby appeasing concerns of a funding crisis in the strained banking sector. The measure was put forward by the Fed, ECB, BoE, BoJ, SNB and BoC; potentially in response to the actions of Standard & Poors a day earlier when the credit ratings agency moved to downgrade a plethora of banks. In addition China, the world’s second largest economy, also eased monetary policy by cutting the required reserve ratio for banks, a shift that was mirrored in another major emerging market, Brazil.
This kind of response from global central banks is reminiscent of the actions taken during the darkest days after the Lehman crisis, perhaps suggesting that policymakers are bracing for another cataclysmic financial event – or more optimistically, that lessons have been learned from the last financial crisis and a speedier, more precautionary approach is being adopted. Either way, risk assets have enjoyed a revival as a consequence of yesterday’s announcements. EURUSD has peeked back above 1.3500 levels for the first time since the 23 November, and equity markets have rallied strongly. During the Asian session, the Nikkei has gained +1.9% on the day, the Shanghai Composite is trading up +2.3%, and the Hang Seng is up a whopping +5.6% thus far.
Adding to the sense of buoyancy, yesterday’s ADP employment report in the US came out much better than expected; the November reading hit 206k compared to estimates looking for only 130k, and there were upward revisions to the prior month’s reading. This should raise expectations for Friday’s more important non-farm payrolls release, but we still expect headline risk to have a bigger impact on FX markets than any single data point.
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This kind of response from global central banks is reminiscent of the actions taken during the darkest days after the Lehman crisis, perhaps suggesting that policymakers are bracing for another cataclysmic financial event – or more optimistically, that lessons have been learned from the last financial crisis and a speedier, more precautionary approach is being adopted. Either way, risk assets have enjoyed a revival as a consequence of yesterday’s announcements. EURUSD has peeked back above 1.3500 levels for the first time since the 23 November, and equity markets have rallied strongly. During the Asian session, the Nikkei has gained +1.9% on the day, the Shanghai Composite is trading up +2.3%, and the Hang Seng is up a whopping +5.6% thus far.
Adding to the sense of buoyancy, yesterday’s ADP employment report in the US came out much better than expected; the November reading hit 206k compared to estimates looking for only 130k, and there were upward revisions to the prior month’s reading. This should raise expectations for Friday’s more important non-farm payrolls release, but we still expect headline risk to have a bigger impact on FX markets than any single data point.
By
M.Zohaib Gadit
Forex Trading Consultant
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