Joint Central Bank Move Weighs on JPY

The major currency pairs moved sharply in early Wednesday trading following the announcement of a concerted central bank move, consisting of the Fed, BoE, ECB, SNB and BoC, to alleviate global liquidity concerns and inject much-needed cash into the credit-tight financial markets. The Fed pledged at least $40 billion in a new term auction facility in which loans would be auctioned off at rates far beneath the discount rate, as well as announcing swap lines with the ECB and SNB for up to 6-months. The kneejerk reaction to the news was a sharp jump higher in US equity futures, which coincided with a sell-off in the yen as traders rewarded the carry trade pairs. The dollar came under selling pressure against the euro and sterling, falling to 1.4748 and 2.0576, respectively.

Further, to quell market suspicion that today’s announcement was in response to yesterday’s dour reaction to the FOMC’s 25-basis point rate cut, a senior Fed official said the coordinated central bank initiative has been in the works for some time. The Fed official said that the market would not know which banks borrow from auction facility and was not about specific institutions, but rather aimed at market functioning.

The ECB’s Papademos commented that the joint central bank move was aimed at easing “elevated pressures” in the term market and that the move was consistent with the ECB’s current monetary policy stance. Papademos assured there was no crisis on financial markets as a whole, and that money market tensions have had a limited impact on firms and consumers’ borrowing rates.

Economic data released from the US included the October trade deficit, which crept up to $57.82 billion versus $56.45 billion a month earlier, and slightly higher than consensus estimates. Import prices also jumped higher than expected at 2.7% versus calls for an increase to 2.0% from 1.8% in the previous month.

Key data slated for release on Thursday will see weekly jobless claims, November producer prices, and retail sales. Weekly jobless claims are estimated to slip to 335k, versus 338k last week. The November headline PPI is seen climbing to 1.5% m/m versus a 0.1% reading from October, while the core PPI figure is forecast to 0.2% from a flat reading previously. The more important reading will be retail sales, to gauge the US consumers’ resilience to recent financial market turmoil and persistent deterioration in the housing market. Retail sales for November are estimated to rise by 0.6% from 0.2% a month earlier. The excluding automobiles figure is also expected to improve to 0.6%.