Bridge Loans to ... Everywhere

Daily Forex Fundamentals | Written by Ashraf Laidi | Sep 17 08 07:52 GMT |

Now that the Fed has assumed 85% of AIG in return of an $80 bln bridge loan, the central bank has relegated monetary policy to near irrelevance as far as market impact of future measures. Repo purchases of $70 billion on Monday and $50 billion on Tuesday as well as $85 billion loan for AIG is equivalent to as many as three 25-bp rate cuts as far market reaction and magnitude of liquidity creation are concerned in terms of Fed's historical forays. Given the increasingly short duration of resulting market rallies following Federal (Treasury and Fed) interventions, the US central bank is progressively re-writing the rules and making history as the only effective way to create some type of lasting market reaction. This announcement risks further desensitizing markets at the next major intervention or buyout by the "authorities". While on one hand the Fed is attempting to stick to the rules of attaining price stability by not cutting interest rates, it has broken all rules of bailout and moral hazard. Finally, this is a deja vu situation of the Fed's disappointing Dec 11th announcement to cut rates by only 25 bps, only to be forced by markets the next day to provide record liquidity alongside European central banks. Will the Fed now take over Ford or GM? FOREX REACTION Risk Appetite Pendulum swings back to the upside, boosting high yielding currencies against the yen, while the dollar is falling against all currencies except the yen, suggesting the market interpretation of the AIG bailout is not a dollar positive story but rather positive for risk appetite. Gold hits new session high at $785 per ounce. The next question is how short-lived will the latest surge in appetite be? Ashraf Laidi http://www.ashraflaidi.com