Fed's Actions Reverberate But EUR/USD Capped at 1.3500 For Now

Last updated 3/19/2009 5:39 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Fed's QE move reverberates in FX
• Angela Merkel - important to wait before further stimulus is due
• Equities lower in Asia but slightly higher in Europe
• Oil at $49/bbl as $50 comes into play
• Gold bounces to $933/oz after testing $900/oz support

Overnight Eco

• JPY All Industries Activity -1.7% vs. -2.0%
• AUD Housing Starts massive decline to -9.9% from 1.0% expected
• AUD New Motor Vehicle Sales -3.5%
• CHF Trade Balance worse at 0.73B vs. 1.01B
• GBP Public Sector Net Borrowing 9.0B vs. 8.0B
• GBP Prelim M4 Money Supply 1.4% as expected
• CHF ZEW Economic Expectations n/a

Event Risk on Tap

• CAD CPI
• GBP CBI Industrial Order Expectations
• CAD Foreign Securities Purchases
• USD Unemployment Claims
• USD Philly Fed Manufacturing Index expected at -40.0
• USD CB Leading Index expected at -0.6%

Price Action

• USD/JPY runs to 9520 in Asia but bounces as 9500 now acts as support
• AUD/USD anti-dollar flow takes it to 6800
• GBP/USD holds 1.4300 but UK data ahead
• EUR/USD flirts with 1.3500 as this becomes key level of resistance

The reverberations from yesterday’s surprise announcement by the Fed continued in the currency market with EUR/USD remaining bid in early European trade but the 1.3500 handle remained serious resistance as the pair had trouble penetrating that level. Yesterday’s announcement by the FOMC that it will purchase up to $300 Billion in US Treasury securities, spurred a massive dollar sell off as few traders expected the Fed to initiate quantitative easing quite so soon and on such a large scale.

Today, the Fed will also begin it TALF program, intended to lend as much as $1 Trillion dollars for securitized instruments backed by consumer debt such as car loans and college tuitions. Bloomberg reported today that the TALF may also be expanded to absorb older, less liquid securities allowing banks to get rid of some toxic assets on their balance sheets. All in all, the initiatives announced over the past 24 hours demonstrate that the Fed is becoming increasingly aggressive in its monetary policy in order to stimulate the moribund US economy.

In effect, yesterday’s pronouncement by Chairman Bernanke represents an “all-in bet” on massive monetary stimulus in order to stem the worst contraction in the US economy since World War II. The move is of course wildly dilutive to the currency with nearly $1 Trillion created out of thin air. Little wonder then why the dollar collapsed across the board even as other asset classes rallied. It also indicates that the Fed may have come to the conclusion that the two biggest customers for US debt – China and Japan – may be unable or unwilling to provide additional capital to finance the gargantuan expansion of US fiscal spending this year and next. By stepping into the US Treasury market, the Fed is acting as the buyer of last resort and only time will tell if this strategy succeeds or simply debases the dollar further.

Meanwhile the EUR/USD basked in the benefit of anti-dollar flow rising more than 3% in yesterday’s trade. However having gained more than 500 points in just 24 hours the pair has run into serious resistance at the 1.3500 level. The sudden spike in the EUR/USD will only rub salt on the wounds of beleaguered EZ exporters who are already struggling with 20% plus fall off in demand for their products. However, EZ producer's laments notwithstanding the EUR/USD is now trading on strong speculative momentum and if yesterday’s policy change prompts a panicky liquidation of dollar assets, the pair could have more upside left.

In North American session today the market will focus on Philly Fed and LEI data both of which are expected to be negative. Dollar bulls are desperately hoping for some signs of stabilization in the economic data, but if the releases show no improvement, the buck’s slide could continue for the rest of the day.

Euro's Gains Hard To Sustain

FX Upcoming

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.