- The dramatic market moves this week forcing the hands of central bankers.
- Fed and Bank of Japan intervening in market instability.
USD/JPY is trading back above the 105 handle between 104.50 and 105.20, +0.42%, spiking in the Tokyo opening hour as the market suspects intervention following an unscheduled injection of 500bn yen in liquidity. At the time of writing, USD/JPY is trading at 105.04 having travelled between a low of 104.50 and a high of 105.20.
According to MNI, “The BOJ is considering sending its strongest message yet that it will stabilise financial markets and provide ample support to the real economy, MNI understands.”
Open market operations
The dramatic market moves this week are leading to intervention from central bankers. Overnight, on Wall Street, just ahead of a 30-year auction, the New York Fed injected 500b on a three-month repo in open market operations. Thus sent the dollar crashing and supported US tocks off their lows following a 10% drop in the session for the worst performance since the market crash of 1987. More on that here: Wall Street Close: Worst drop since 1987’s market crash amid the coronavirus fears
“The US Federal Reserve announced a significant injection of cash to assure liquidity and help stem the panic in the markets, addressing the “highly unusual” and “temporary disruptions in the Treasury financing markets,” analysts at Westpac explained, adding, “The NY Fed said it is expanding its asset purchases beyond treasury bills to a range of maturities including nominal and inflation-linked bonds, and floating-rate notes. It conducted a $500bn 3mth repo overnight and will offer on Friday a further $1tr. The existing daily $175bn overnight repos and $45bn 2wk repos (twice per week) will continue.”
Consequently, the US 2-year treasury yields ranged between 0.35% and 0.49%, while 10-year yields climbed from 0.63% to 0.88% in a repeat of yesterday’s “anomalous behaviour and perhaps pointing to the liquidation of assets,” analysts at Westpac suspected.
The Federal reserve is suspected to cut rates to zero over the next two meetings and the prospects of QE4 will likely weigh on the greenback. “If the Fed cuts rates to zero by this meeting as we expect, Chair Powell’s press conference should focus on the next policy steps should the outlook deteriorate further,” analysts at Deutsche Bank argued. “Consistent with the lessons from the ongoing policy review, we expect that the Fed will first use forward guidance to signal their intent to keep rates on hold until downside risks to the outlook subside and inflation is sustainably at 2%, a move in the direction of average inflation targeting.”