Federal Reserve Foreign and International Repurchase Program, Talking Points:
- The Fed’s latest coronavirus mitigation program is a powerful backstop for Dollar funding
- It offers markets reassurance that the Fed accepts responsibility for credit beyond US shores
- Coupled with existing Dollar swap lines that makes a big difference
Growth correlated assets such as stocks, commodity currencies and energy have been beaten down by the coronavirus’ spread, which it’s clearly beyond the power of any authority to quickly halt. However, the Federal Reserve’s latest remedy program will at least offer these markets hope that US Dollar funding problems won’t metastasize into broader credit collapse.
The latest in an alphabet soup of plans, the Foreign and International Monetary Authorities Repurchase Program (FIMA) announced this week will allow central banks to instantly but temporarily convert their holdings of US Treasury bills into Dollars which can then be lent into their economies.
This is hugely important because the impulse to fly into the US Dollar in times of trouble has seen among other things a massive outflow of funds from emerging markets where many businesses have Dollar-denominated debt to pay. The sight of offshore US Dollar funding starting to dry up had many investors around the world on watch for a ‘credit event.’
Now FIMA sits alongside previously announced Dollar swap lines with other major central banks. It ought to be a powerful tool for snuffing out any smoldering credit brushfires before they kindle a more powerful and hard-to-fight conflagration.
Credit No Magic Wand In Locked-Down Markets
Of course, it’s not perfect. Nothing can be. Ultimately credit will only achieve so much in a forcibly stunted economic world where agents are not free to engage with customers. Moreover, it’s not going to be much help to countries short of Treasury collateral (although it may in passing encourage many of them to rethink that shortage).
But the Fed’s public acceptance of its responsibility to shore up not only the US system, but global Dollar demand, is a huge weight off the minds of investors.
The announcement of FIMA has not prevented strongly growth-correlated markets such as the Australian Dollar from heading lower this week. It can’t, the coronavirus remains very much in charge of sentiment, and will for some time.
Recommended by David Cottle
Improve your trading with IG Client Sentiment Data
However, the Aussie remains like its peers well above this month’s lows in the wake of the FIMA announcement. It’s far from certain that those lows would not have been revisited, and perhaps even abandoned to the downside, without the Fed’s timely backstop.
Investors can not keep an eye on the US central bank’s weekly updates on FIMA take-up here. Lending under the facility will begin on April 6.
Resources for Traders
Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.
— Written by David Cottle, DailyFX Research
Follow David on Twitter @DavidCottleFX or use the Comments section below to get in touch!