March 19, 2020 / 3:00 PM / 17 days ago

Analyst View: Fed opens central bank swap lines to stave off coronavirus slump

NEW YORK (Reuters) - The U.S. Federal Reserve on Thursday opened the taps for central banks in nine new countries to access dollars in hopes of preventing the coronavirus epidemic from causing a global economic rout.

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis -/File Photo

The S&P 500 .SPX moved higher by late morning while U.S. Treasury yields were mainly down after the Fed announced the swap lines, another in a series of unprecedented actions to keep credit markets from seizing up and ensure access to dollars.

It will accept other currencies as collateral in exchange for dollars for at least the next six months to allow the central banks of Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand access to a total of $450 billion to ensure the world’s dollar-dependent financial system continues to function.

COMMENTS:

MAZEN ISSA, SENIOR CURRENCY STRATEGIST, TD SECURITIES, NEW YORK

“Having this FX swap line is going to be pretty important down the line. But from a confidence point of view, when that has been impacted it’s really hard to have normalized reaction functions.”

“I think the one thing we really need to see is more fiscal ammunition coming to the fore. It’s taking a long time particularly for Congress to get their act together and deliver something. You’ve got to think about those that are asked to be socially distant and stay home from work and not earn a paycheck and they’re taking their time to make them whole. They need to speed it up.”

“I think that will go a long way toward helping markets maybe stop the freefall.”

QUINCY KROSBY, CHIEF MARKET STRATEGIST, PRUDENTIAL FINANCIAL, NEWARK, NEW JERSEY

“Dollar swaps are a standard part of the system. These are important, and they’re going to need more of this because you have to provide liquidity to have the system work.

“You can argue it should be more comforting to the market, but it takes time for it to work its way into the system. Usually, it’s not immediate. We have to watch every nook and cranny of this financial system for signs of dislocation, and the Fed is focused on that.”

RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS

“I think it is just another in a long line of efforts that they are making to try to calm the markets down. It does seem to be having some impact today. Hopefully it will be a little longer lived than some of these others that we have seen. We have had some pretty bold moves by the Fed in the last week or two and most of them have had a very short-lived impact on the market so hopefully this one will help.”

“It speaks also to the fact that when they cut rates to zero a lot of people had commented that they thought maybe the Fed is out of bullets if you will, but it doesn’t seem to be the case. It sounds like they have lots of tools still available to them and this is just another one of them.”

MICHAEL SKORDELES, U.S. MACRO STRATEGIST, TRUIST/SUNTRUST ADVISORY SERVICES, ATLANTA

“We have a twice-daily team call, and yesterday afternoon, our discussion was engulfed by the strength of the dollar. You’re going to murder emerging markets in particular with the dollar strengthening further. It’s just bad on a lot of levels.”

“Oil is having all these gyrations because of other stuff going on, but the collateral for that is U.S. Treasuries, and to buy U.S. Treasuries, you need dollars. All these things kind of happening at once causes a lot of dominoes to fall, and as the dominoes fall, it creates more demand, pushing people toward the dollar.”

“This (dollar swap lines) is going to help, but it’s not a silver bullet. Since it was announced formally, we’ve seen the DXY back off roughly a percent, though now it’s kind of sitting there. One of the things that needs to happen in particular the ECB, which is not quite half the basket (of the dollar index), needs to do some expansion of quantitative easing or open the door somehow to let the market know it’s willing to do more, which is what the Fed did.”

“In the last 45 minutes, South Africa cut its repo rate. We need to continue to see these particular emerging markets countries cut rates and do some sort of monetary policy weakening … Since we went to zero, they have room to cut. The rate cuts are not helping out our economy, but cutting that rate in their countries is going to help them.”

“In normal times, our cutting rates would strength their currency, but because there’s a flow of capital into dollar-denominated assets, in particular U.S. Treasuries, it’s starving these countries of liquidity and making the dollar appreciate.”

Compiled by Alden Bentley; Additional reporting by April Joyner and Lewis Krauskopf in New York

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