In what seems to be a replay of the movie that played out during the 2008 global financial crisis, the FOMC has cut interest rates to zero and has also announced a comprehensive $700billion quantitative easing program to stave off the negative impact of the coronavirus outbreak.
This move is coming in the light of mounting evidence that the coronavirus outbreak has gained a significant foothold in the US, with a case count that is far higher than initially thought. Facing significant economic and market disruptions, the Federal Reserve has taken an emergency action to lengthen the term of loans it provides to banks to 90 days, while lowering the lending rate at the discount window to 0.25%.
The FOMC said in a statement explaining the 2nd rate cut in a week, that “the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States.” A $700billion quantitative easing program to be used to buy Treasuries and mortgage-backed securities is being launched as well.
This move is part of a coordinated response by global central banks on Sunday to enhance global liquidity by cutting the existing dollar swap rates by 25 Bps.
Recall that at the height of the global financial crisis of 2008, the US government launched a Toxic Asset Relief Program (TARP), in which $700billion was used to national dying companies and clean up failing assets to save the financial system. The only difference is that back then, the FOMC rolled out interest rate cuts, TARP and the QE programs over time. This time, the FOMC has thrown them up in a single day.
These actions have taken place on a Sunday as financial markets stay closed for the weekend. I expect a positive response from the global stock markets to this news. Emphasis will be on the USDJPY pair as well as the US markets.
The USDJPY has just opened for the week with a downside gap. With 107.03 as the current resistance, closure of the gap breaks this resistance, in which case 107.82 would present itself as a logical target—recent highs of March 2 and 13 serving as a further upside target at 108.42. Attainment of the previous channel’s lower border at 109.30 depends on the ability of the USDJPY to breach 108.42.
On the flip side, we see 106.65 as the next support level. Only a break of this support would make 104.56 a relevant downside target.