Market Wrap: Fed's 75bps Emergency Cut Seems Not Enough

Market Overview | Written by ActionForex.com | Jan 22 08 21:24 GMT |

Market turned 180 degrees after Fed's emergency 75bps rate cut. Yesterday's top losers, AUD/JPY, NZD/JPY, NZD/USD and EUR/JPY become today's top movers. The intermeeting 75bps cut in federal funds rate to 3.50% from Fed is the first emergency rate cut since 01 and the largest single day reduction since 1984. Discount rate was also cut by 75bps to 4.00%. Stated in the accompanying statement, the committee took the rate cut action in view of a "weakening of the economic outlook and increasing downside risks to growth." Broader financial markets conditions are noted to have continued to "deteriorate" and credit has "tightened further". Housing contraction and softening in labor markets are also indicated by recent data. The Fed does not rule out further rate cut as it will "act in a timely manner" to address downside risks to growth. St. Louis Fed President Poole voted against the emergency rate cut. The statement says that Poole "did not believe that current conditions justified policy action before the regularly scheduled meeting next week." Fed Governor Mishkin was absent and did not vote.

Dow was once over 400pts lower, following two days of crashes in global equity markets but recovered most of its losses. Though, market's responses are still quite different from what happened last Aug, when the Fed cut the discount rate by 50 basis points in a surprise intermeeting move, stock market futures reversed deep losses and opened in positive territory. This time, Fed's decision is still not enough to push the US stock markets back to positive territory. Opinions are divided on what Fed will do in its next meeting next week, but markets are generally still expecting more rate cuts from Fed, ranging from 25bps to 50bps.

Technically speaking, note the steadiness in USD/JPY in today's generally volatile trading. While future rate path of Fed will certainly play in important role in dollar's trend, risk aversion will likely be the more influential factor in both dollar and yen. Asian market's response to Fed's cut is yet to be seen and should be paid close attention to.

As widely expected, the Bank of Canada cut interest rates by 25 bps to 4% at today's regularly scheduled policy meeting. In the accompanying statement, several factors were quoted as the reasons for the cut including unsettled global financial markets, tightened credit conditions as well as concerns over a US recession. Further easing is still generally expected unless there is a sharp turn in the upcoming economic data. The Bank's detailed projection for the economy and inflation, and risks to the projection, will be published in the Monetary Policy Report Update on Jan 24.

Said in a speech today, BoE Governor King said that 2008 will probably be a year of " above target inflation and a marked slowing in growth. UK inflation may breach 3.0% again in 2008 as weaker pound will exacerbate inflationary pressures. While BoE is 'determined to keep inflation on track', if the rise is inflation does not affect 'longer-term' expectations, it could start to fall back towards the end of the year.

Overnight, BoJ left rates unchanged at 0.5% as widely expected. The vote was unanimous. In the monthly report, BoJ noted that the economy is still expanding moderately but growth rate may be slowed down by drop in housing investment.

In additional to the stock markets movements, Australian CPI will be the main focus in the coming Asian session. CPI is expected to rise 1.00% qoq in Q4, pushing yoy rate sharply higher to 3.00%. While re-emergence of inflationary pressure will be a concern of the RBA, it's increasingly doubtful that RBA will instead choose to stand pat due to uncertainty in the global financial markets.

Source : Actionforex