Mike Paterson’s Forex Update

Latest News:

This morning I talked of the huge volatility in tight ranges and that in this $3.6 trillion turnover per day FX market something was brewing, and so it’s proved as the US Fed and five other central banks, announce emergency measures to add liquidity to the global financial system by lowering the cost of USD swaps by 50 basis points.

Here’s the statement in full:

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Statement from the US Federal Reserve:

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013.

The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.

U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.

The action has surprised the markets and caused a drop in the US $ but a sharp rally in sentiment across the board as yet again traders hope this can provide some sort of solution. EURUSD has so far been up to 1.3505, GBPUSD up to 1.5730, AUDUSD to 1.0333 and USDCHF down to 0.9065.

There is no doubt the rallies will be sold again, and already have been, but this is action not rhetoric or rumour and provides something a little more substantial for the more bullish sentiment. Only time will tell.

Equities and Gold are both higher too but there’s plenty more to be played out before the day is through.

Interbank Rates as of 13:42 BST

Current Price

Today so Far

High

Low

EUR/USD

1.3475

1.3505

1.3260

GBP/USD

1.5730

1.5738

1.5525

EUR/GBP

0.8568

0.8592

0.8520

GBP/EUR

1.1667

1.1739

1.1637

GBP/CHF

1.4307

1.4414

1.4274

GBP/AUD

1.5329

1.5641

1.5204

AUD/USD

1.0286

1.0333

0.9942

EUR?CHF

1.2259

1.2295

1.2250

GBP/ZAR

12.8259

13.1733

12.7380

USD/JPY

77.49

78.12

77.28

Agree or disagree? Then please leave a comment in the box below or contact me by e-mail.

Mike ‘Oscar’ Paterson has been in the Forex trenches for nearly three decades working as a senior Spot trader in London at UBS, Chief Dealer FX at the State Bank of Victoria and in charge of Spot CHF at Credit Suisse with a daily turnover in excess of $1.5 billion. Mike now works as an independent consultant providing a fully bespoke service to the corporate and private sectors in physical FX delivery as well as guiding those who wish to improve their currency trading. Mike also presents seminars and workshops and writes for a number of publications.
To contact Mike please call +0044 (0) 1732 700383 or email mike.paterson@economicvoice.com
The views expressed above are those of the author and should not be taken as investment advice. MSP Foreign Exchange Services will have no liability for, or to, any persons executing trades based on the content above.

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