Japanese Yen Remains Weak As Market Fears Ease on US Announcement of Recapitalization Plan, Debt Guarantees

Daily Forex Fundamentals | Written by DailyFX | Oct 14 08 13:15 GMT |

The Japanese yen and US dollar remain weak while US stock market futures have surged as the US Treasury, Federal Reserve, and FDIC have announced unprecedented plans to recapitalize banks via preferred share purchases, while guaranteeing the senior debt of ALL FDIC-insured institutions. Is this the answer the markets have been looking for? The Plan The US Treasury will proceed with a "voluntary capital purchase program" where the US government will buy up to $250 billion in preferred shares from financial institutions at "attractive rates" for the US taxpayer. Institutions that sell shares will have to agree to restrictions on on executive compensation, such as the golden parachutes that many corporate CEO's have received despite the underperformance of their firms. US Treasury Secretary Henry Paulson said that nine large financial institutions had already agreed to the plan, and the news is likely to increase confidence in the US financial sector, and thus could lead US equities to surge today. The FDIC will temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, along with deposits in non-interest bearing deposit transaction accounts (such as basic business payroll checking accounts, which were not protected before). The goal? To allow financial institutions easier access to liquidity by boosting confidence in these banks, which should convince investors that it is safe enough to buy their debt and hold their deposits with the banks. The Federal Reserve also announced that its Commercial Paper Funding Facility (CPFF) program will fund purchases of commercial paper of 3 month maturity from high-quality issuers. The goal here is to allow the commercial paper markets, which have been frozen, to become functional once again. The Market's Reaction US stock markets have responded positively, as DJIA futures jumped, suggesting the index could open as much as 300 points higher. Meanwhile, the Japanese yen and US dollar have been falling back throughout the morning in anticipation of the news and both remain lower, though we have seen the declines slow a bit. Indeed, traders appear to be waiting for the US stock markets to open in order to gauge sentiment. If volatility continues to fall, as the CBOE's VIX Volatility Index plummeted from record highs of 76.94 on Friday to approximately 55 on Monday, this would work in favor of risky assets throughout the markets, including forex carry trades, equities, and commodities going forward. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.