Fed Keeps The Cheap Money Tap Running

By: PaddyPowerTrader

Leading into the release of the US Federal Reserve minutes yesterday evening, the unknown was what the wording of the statement would be like. Some traders were afraid that the Fed would ease back on its promise to keep rates low for an “extended period”. But in the end, the market bulls got what they wanted as the statement included the sentence “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” (For a second consecutive meeting, Kansas City Fed Pres Hoenig dissented, saying that the “extended period” is no longer warranted).

Also the Fed pointed to increased momentum in the US economy’s recovery. This does call into question why the “extended period” phrase was left in? So things are getting better AND you can still have lots of very cheap money for a good while yet. You can’t argue with a deal like that! And the bulls certainly aren’t, as they pushed the Dow back to 10,700 last night.

Overnight, the Bank of Japan held its key interest rate steady, as expected. They also doubled the amount of cash available to banks, albeit with a split vote. There is a belief out there that the Japanese government has been prodding away at the Bank to give out more cheap money to halt the rise in the Japanese Yen. Whatever the reason, the markets liked what they saw. The Nikkei closed 1.2% higher and the Hong Kong Hang Seng gained 1.7%.

This morning, Europe’s main stock markets rose, as everyone welcomed the Fed’s upbeat economic outlook. London’s FTSE is up 0.6%, led by mining shares, while here in Dublin, the Irish index ISEQ is up 2.1%, with bank shares on a roll. Allied Irish Banks soared almost 9% and Bank of Ireland is trading a tasty 8% higher. AIB launched their €2.9bn bond exchange offer, its first step in generating capital through self-help measures. Interest rates on the exchange bonds are very costly though, ranging from 10.75% to 11.5%. But the market does like their creative (and desperate) attempts to stay out of majority state ownership.

The Dow is off to its seventh-straight positive session at the open. Energy stocks are off to a flying start amid higher commodity prices. But its not all good news. Blockbuster has lost about one-quarter of its market cap after the video-rental chain warned that it may have to file for bankruptcy amid soaring debt levels.

Today’s Market Moving Stories

•The Bank of England’s Monetary Policy Committee minutes showed that they voted unanimously to keep interest rates at a 0.5% and leave a £200 billion quantitative easing programme unchanged. No dissenters– all nine members toeing the line. Poor Governor King is in a difficult spot – he has to deal with a fragile economy and rampant inflation (3.5% in January). At least most of the other major world economies don’t have an inflation problem at the moment.
•On the brighter side off things, UK unemployment in February showed a surprise fall. In fact, it was the biggest fall since 1997 with 32,300 less people claiming in February. Sterling is getting a boost from this.
•The European Commission has been in a critical mood this morning. On Ireland, they want to see more concrete measures by the government to get the budget deficit to within EU limits by 2014. Ditto for the UK, saying that their deficit-cutting plans were “not ambitious enough”. In general, the Commission said that the economic forecasts in most of the 14 EU countries analysed were optimistic, while plans to reduce deficits were not backed up by specific measures.
•Oil prices are up a little as OPEC members agreed to hold the cartel’s output steady. The no-change decision was in line with market expectations. Sentiment was also lifted by signs of improving US energy demand but watch out for the key weekly inventories report at 14:30.
•Looks like Fed Chairman Ben Bernanke will advocate for the Fed to receive systemic risk oversight, i.e. more power, “because of its wide range of expertise, the Federal Reserve is uniquely suited to supervise large, complex financial organizations and to address both safety and soundness risks and risks to the stability of the financial system as a whole.” His words, not mine.
•Ok, for the day that’s in it, here are some fast facts about St. Patrick’s Day.

The Carry Trade Is Back
On the back of the Fed’s minutes, currencies have gotten the green light to rally. The carry trade is back on! The South African rand, Australian dollar, and the New Zealand dollar have been some of the biggest gainers in the past 24 hours as USD/ZAR falls and AUD/USD and NZD/USD rises. NZD/USD is actually at a six month high.

The Australian dollar was also boosted by a central bank official who suggested Australian interest rates will be moving higher sometime soon. RBA official Guy Debelle, said interest rates “look likely to rise a bit further” in a panel discussion. The RBA became the first G20 member to raise rates in 2010 on March 3 when they bumped them up 0.25%. This was the fourth move up by the RBA in five meetings, and signalled further gains would occur as the economy strengthens. Data released overnight by Westpac Banking Corp showed economic indicators rose in January to the highest level in more than a year. The Aussie dollar was also helped by the move in Gold which is up nearly 2% in the past two days.

Senators To Lay Down The Law to China
Five US Senators introduced legislation yesterday to make it easier for the US to declare currency misalignments and take corrective action. This bill is clearly aimed at China, and the lawmakers are trying to pressure President Obama and Treasury Secretary Geithner to take a stronger stance against them. This has been brewing for a while now, with a war of words heating up between the congress and the Chinese leader Wen Jiabao. Jiabao continues to dismiss any rapid appreciation of the renminbi, stating “We will continue to improve the mechanism for setting the renminbi exchange rate and keep it basically stable at an appropriate and balanced level”. But congress wants a more aggressive approach to what everyone knows is a manipulated currency.

But these Senators don’t really know what they are asking for. If the Chinese let the renminbi appreciate dramatically, it would automatically cause the value of their large holdings of US Treasuries fall in value. Who do these Senators think will step up to purchase all of the bonds the US Treasury has to issue in order to pay for all of their spending? Do they truly believe the Chinese will continue to purchase US debt and then turn around and push the value of this debt lower by letting the renminbi appreciate vs. the dollar?

And if they believe a higher renminbi will automatically lead to a correction of global imbalances, they are wrong again. “To leave currencies to the vagaries of the market” won’t help rebalance the global economy, according to a report relapsed by the United Nations Conference on Trade and Development released yesterday. “A viable long-term solution to the problem of massive trade distortions and global imbalances cannot be expected from individual central banks trying to find a unilateral solution to a multilateral problem like the exchange rate.” A one time move higher by the renminbi isn’t the ’silver bullet’ which some of these Senators believe it would be.

This tough talk and even the proposed legislation will not make the Chinese move. The Chinese have let their currency appreciate 21% vs. the US dollar since floating it back in July of 2005. The appreciation of the renminbi at a slow and steady pace of around 5% per year.

And Finally… Trailer For ECONned

Disclosures = None

By The Mole
PaddyPowerTrader.com

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.© 2010 Copyright PaddyPowerTrader - All Rights Reserved

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