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Fed Cut Quick Analysis: Panic move exposes financial system's vulnerability, USD buying opportunity?

  • The Federal Reserve slashed interest rates to 0% and announced QE worth $700 billion.
  • The deep cut, coming on Sunday ahead of the market open, reveals the financial system's vulnerability.
  • The safe-haven dollar has dropped but may come into demand.

The Federal Reserve was unable to wait until its scheduled meeting -- again, and this time it went all the way to zero. Less than two weeks after its double-dose 50 basis-point rate cut, it did not wait until its scheduled rate decision on March 18 and has announced a quadruple rate cut -- 100 basis points. The bank wanted to stay ahead of the market open in Asia.

Moreover, the Fed has laid down the details of a massive bond-buying scheme, extending to mortgage-based securities and coming on Monday, March 16. The scale is a gargantuan $700 billion. To top it off, the Fed coordinated cheap dollar swaps to relieve pressure off the US dollar. No fewer than five central banks are involved in these multi-week arrangements. 

Indeed, the greenback has been on the back foot in the wake of Asian trading, with EUR/USD nearing 1.12, GBP/USD around 1.24, and USD/JPY below 107. However, commodity currencies seem unconvinced and are losing ground -- and for good reasons.

The Fed's immense action and extraordinary timing is reminiscent of the 2008 crisis. It came as the financial system had already shown signs of distress, with funding issues causing irregular volatility. While stocks bounced on Friday, the rush into the dollar -- including from the usually safe-haven yen and gold -- is a flashing red alert.

Jerome Powell, Chairman of the Federal Reserve, has said in the improvised call that the "economic outlook is evolving on a daily basis." 

Indeed, events are moving fast, with President Donald Trump -- who triggered Thursday's sell-off with an unconvincing address to the nation -- seeming to be behind the curve. The president initially called coronavirus a hoax and testing it still behind in the US. Many countries in Europe are under significant lockdowns, while the pace of school closures and event cancelations in the US is accelerating. 

Overall, the Federal Reserve has done everything it could to help stabilize the system, and the ball lies in governments' courts, and especially the US one. Moreover, the rapid spread of the virus means that high uncertainty is set to cause more panic selling in markets. Powell used various variations on the words "don't know" when answering questions. 

And when nobody knows, selling may continue and the dollar has room to gain. And as mentioned, it only exposes the level of distress in the system that required such action, and is far from providing assurance. 

The dollar seems to have room to rise while stocks may come under fresh pressure. 

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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