Forex Today: Federal Reserve cuts 50 bps in emergency meeting, FX volatility spikes

Wha you need to know on Wednesday 4th:

Responding to the stock market route as a consequence of the coronavirus fear which has sent US benchmarks into official correction territories, the Federal Reserve, despite their dual mandate which does not include Wall Street’s stocks, responded in kind with an emergency 50 basis point rate cut and left the door open for more. The inter-meeting cut was the first since 2008.

As a result, there was a spike of volatility in commodity and financial markets. The VIX rallied between 24.90-41.1 and the S&P 500 ranged between 2976.63-3136.72 before shedding gains for a low of 87 points or -2.81% on the day. 

Bank Policy Institute prediction trade half-filled

We had been given the heads up by a top economist for the US bank lobby – a former Fed insider – who had issued a remarkably specific prediction on Sunday that the rescue was nigh. In a blog titled “Don’t keep your powder dry” here, Bill Nelson, chief economist at the Bank Policy Institute who worked on the Fed’s responses to the 2007-2008 financial crisis, predicted, “a coordinated global interest rate cut by the top central banks, such as the one executed at the height of the crisis in October 2008 by the Fed and five other central banks. They will possibly include in this action the People’s Bank of China and the Hong Kong Monetary Authority, the two banks whose economies have so far suffered most from the outbreak.

• It will happen this Wednesday, March 4. Nelson noted that the previous big coordinated actions in December 2007, October 2008 and November 2011 all occurred on a Wednesday.
• It will happen before the US stock market opens, either 7 a.m. or 8 a.m. ET (1200 or 1300 GMT).
• It will be big: half a percentage point at least. The Fed’s current benchmark lending rate is set in a range of 1.50-1.75%, and rate futures markets are pricing in a cut of at least a quarter percentage point at the Fed’s next scheduled meeting March 17-18. “The only way to get a positive market reaction is to deliver more than expected,” he wrote. 

FXStreet reported on this, preparing traders for such an eventuality, here: US bank lobby economist predicts global rate cut coming … this Wednesday – Reuters

However, what was surprising was that the G7 communique, basically was an all-talk affair, no walk. It would appear central banks will work on their own and decide what is best for their domestic economic needs, in accordance with the populist policies of recent years. So, a coordinated effort has not played out as according to the prediction although we will expect to see more from central bankers in due course – Bank of Canada is up next. However, the days of bazookers are long gone and that is a concern in the markets – central banks have little ammunition left and are calling on debt ladened governments to add fiscal stimulus. 

FX action notes

• AUD/USD Forecast: Jumps above 0.6600 after Fed move but remains vulnerable

• USD/JPY Forecast: Keeps bearish perspective near 2020 lows

• GBP/USD Forecast: Struggling to hold on to Fed-led gains

• EUR/USD Forecast: Extends rally above 1.1200 as the Fed delivers a rate cut

Trump and central bank speaker notes

Trump says market is in good shape, will approve a payroll tax cut for middle-income earners

US President Donald Trump: US may block travel to coronavirus hot spots

US Pres. Trump says he expects $8.5B emergency coronavirus funding bill

Powell speech: Our decisions are without political considerations

Powell speech: We have not looked at other policy measures yet

Powell speech: We are in active discussions with other central banks

Powell speech: FOMC judged the risk to the outlook has changed materially

Fed Press Conference: Chairman Jerome Powell speech live stream – March 3

Fed’s Mester: Coronavirus will weigh on US economic growth in the first half of 2020

US Pres Trump: Coronavirus spread isn’t necessarily inevitable, Fed rate still too high 

German Finmin Scholz says Germany to act immediately with all strength on coronavirus

ECB’s Knot: Virus could cause great damage to Dutch economy

ECB’s Villeroy: Growth should remain positive for the eurozone as a whole this year

Commodity complex and US yields

The CRB index rallied on dollar weakness, with the DXY falling below the 97 handle and signs of reflation on the way. However, the uncertainties and drastic emergency measures spooked the base metals, with both copper and nickel down. The Fed’s move is likely to reinvigorate demand for gold. Oil prices rose to fresh intraday highs as the OPEC+ monitoring committee gather to discuss production cuts although gave back the gains to finish -0.8% in the red, WTI. 

Meanwhile, the US 2-year treasury yields fell from 0.90% to 0.62% then 0.70%, the 10-year yield from 1.17% to 0.90% – a fresh record low – before steadying around 1.00%. “Despite the inter-meeting rate cut, markets are pricing a 50% chance of 25bp cut at the next FOMC meeting on 18 March, and a terminal rate of 0.50% (vs Fed’s mid-rate at 1.13% currently),” analysts at Westpac explained. 

Day ahead

Following the Reserve Bank of Australia’s rate cut yesterday, Australia’s quarterly national accounts which are due at 11:30am Syd/8:30am Sing/HK will be of particular interest, as will hina’s February Caixin Services PMI 12:45pm Syd/9:45am local.