• Joel

USD Slammed as Fed Unveils Huge Lending Programme

USD got absolutely hammered today after the Fed surprised the market with a HUGE new stimulus package worth some $2.3trln. 

DXY slipped to roughly 99.50 from well above the 100 mark on the news of this huge new Fed loan package, partly on the unexpectedly dovish nature of the move (when a central bank eases policy more aggressively/more than expected, it is normally a negative for the respective currency) but also because the news triggered a huge boat of risk on. 

Global equities were buoyed, with the S&P 500 moving briefly back north of the 2800 level (meaning it has now retraced over 50% of its total Covid-19 crisis losses). Crude markets also bounced, while risk sensitive FX, including AUD, NZD and EMFX currencies such as TRY, ZAR and MXN also outperformed. Havens, such as US bonds, JPY, CHF and USD underperformed. 

The Fed’s HUGE new lending programme

The FOMC will provide up to $2.3trln in loans, with $500bln being allocated to a municipal facility (where loans will be offered to local governments within the US) while $600bln will be allocated to a main street facility (where loans will be made to small and medium-sized businesses). 

Fed Chair Powell gave remarks shortly after the announcement. Summing up the gravity of the crisis faced by the US (and global) economy due to the Covid-19 outbreak, he said “our emergency measures are reserved for truly rare circumstances, such as those we face today. When the economy is well on its way back to recovery, and private markets & institutions are once again able to perform.. we will put these emergency tools away"

He went on to reiterate that the Fed’s ability to lend and create money is only limited by the law and that the Fed can keep providing support to the economy as needed with no limit to how long they can do it.

Finally, the Fed Chair emphasised that one thing he is not worried about at the moment is inflation. 

The Fed will likely be pleased with how the market reacted to its latest aid programme; USD weaker and stocks higher. 

More broadly, one could argue (from a market perspective) that the Fed has done a good job in its response to the Covid-19 crisis so far. With the exception of their first emergency 50bps cut, which spooked markets at a time when the gravity of the Covid-19 crisis was yet to fully sink in, each of their emergency actions has managed to provide a lift to sentiment and weaken USD. 

Be that their announcement of HUGE USD currency swap lines with global central banks, done to ease the global shortage of USD funding. The initial announcement of this policy managed to substantially weaken USD. 

Moreover, the Fed’s emergency 100bps rate cut and the subsequent announcement of limitless QE. Both managed to boost stock markets, substantially ease measures of financial market stress, while also weakening USD. 

With the Fed having acted aggressively to do all they can, the rest is up to fiscal policymakers. They too seem to have acted fairly quickly, passing stimulus package three just a few weeks ago worth some $2trln USD and even containing elements of universal basic income. 

Congress is currently wrangling over a further fiscal package, with the Trump Administration’s proposed $250bln for small business lending today being rejected; the Democrats reportedly want an even bigger package, which can hardly be bad news. 

Will this be enough? 

Only time will tell. 

Today’s jobless claims data show that roughly 16mln Americans have claimed unemployment benefits for the first time in the past three weeks. And this is surely just the beginning. 

Indeed, the US may struggle to keep a lid on unemployment; it lacks the same comprehensive government-funded national furlough scheme that creates huge incentives not to lay workers off that countries such as the UK and Germany have. 

Should unemployment surpass levels seen during the great depression in the late 19



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