Quantitative Easing?

Just what is Quantitative easing? It is a term heard frequently when referring to actions by the US Federal Reserve. The frequently used term is composed of two words, Quantitative, which refers to the money supply and easing, which means to increase the money supply. It is a tool of monetary policy and means that a central bank or government prints new money to increase the supply. The move by the Fed is bound to have an effect on the Interbank Forex market but to what extent is unknown at this time.

Fed Slashes Rates

On Tuesday the Federal Reserve cut overnight rates to zero to 0.25 %, an unconventional action meant to lift the economy out of a year-long recession. Doug Roberts, chief investment strategist at Channel Capital Research.com stated, “The message is they’re instituting quantitative easing on a fairly large scale.”

How it Works

Under quantitative easing, the Federal Reserve will flood the banking system with new money to promote lending. The action is usually taken when lowering interest rates is no longer effective because they already are at or near zero.

Central banks add cash by buying up large quantities of securities, mortgages, government debt, commercial loans, and even stocks from banks and financial institutions giving them plenty of money to lend. The Fed hopes the move will ‘prime the pump’ of the Interbank Forex market and get banks lending again.

Easing of Frozen Credit Markets

Recently the tool has been used by Japan to stimulate the economy and to fight inflation. Much of the global economic crisis is caused by frozen credit markets. Many corporations find themselves unable to secure loans necessary for day to day operations. The credit crunch has adversely affected the Interbank Forex market and banks have been unwilling to lend to each other.

Quantitative easing helped Japan to stimulate their economy and to make sure there was no shortage of liquidity. The Fed hopes it will do the same for the beleaguered US economy and stimulate lending on Interbank Forex markets.

LIBOR Falls

The cost of three month dollar loans between banks fell ahead of an anticipated rate cut by the US Federal Reserve. The interbank lending rate for 3 month dollar loans known as the London Interbank Offered Rate (LIBOR) fell to just over 1.87 percent according to the British Bankers Association. This move is expected to affect the interbank Forex market as bankers await the decision of the Federal Reserve.

Fed Expected to Cut Rates Further

The Fed is expected to cut its rate to 0.50, it’s lowest in history. At the same time the rate for 3 month loans in Euros known as the EURIBOR fell 0.04 percentage points to 3.25 percent. The equivalent rate for British Pounds fell 0.05 percentage points to around 3.13%.

Interbank Forex Affects Everyone

Interbank Forex rates are important because they affect the costs of loans such as student loans or mortgages. Many US citizens are unaware that their home loans may be tied to LIBOR rates. In recent months rates have been high as banks hoarded cash instead of lending, creating a credit crunch affecting the day to day economy. Interbank fx rates affect the average person in ways they unaware of.

Rates Remain Above Benchmarks

All three lending rates still remain above the benchmarks set by central banks, 1 %in the U.S., 2.00 %in Britain and 2.50 %in the 15-nation euro zone. These figures suggest that banks are still reluctant to lend and the interbank forex market remains somewhat volatile because of this reluctance. The difference between bank lending rates and official base rates have fallen back towards one percentage point , well below levels seen in the Fall.

The interbank force market affects us all and although the average small investor does not have direct access to interbank Forex data, close monitoring of movements by central banks can yield some very useful information that can be turned into profits on Forex markets.

GM Warns They Could Be Out Of Business In a Month

The predictions for Friday’s non farm payroll report are expected to be grim. One of the few pieces of news that could increase risk appetite is the proposed bailout of US automakers. General Motors warned they could be out of business in less than a month if the bailout package is not approved resulting in the loss of millions of jobs. Chrysler has stated essentially the same thing.

ECB to Lower Rates

In the meantime European Central Banks were expected to lower rates further affecting the interbank forex market. There are signs that credit markets are thawing slightly but not enough to jump start the global economy. In addition the US treasury is considering steps to new steps to strengthen bank capital and measures to lessen home foreclosures.

Uneasy Business and Government Partnrship

The global economic crisis is unprecedented and there is now an uneasy partnership between business and government in the US. Both business and government are sailing into uncharted waters in an attempt to prevent a global economic meltdown. The US government is injecting billions in new capital into banks to prime credit markets that provide such consumer services as auto loans, student loans, mortgages, and credit for day to day operations of businesses.

Interbank Lending Essential

Interbank forex is essential for the smooth functioning of the global economy. US interbank forex and lending rates have remained at the same rate since Monday and stocks have rallied slightly due to expectations that the US government will bailout the major automakers. Investors want this bailout and the sooner the better. It is expected that the bailout would have a positive effect on stock and commodity markets and increase risk appetite in forex markets. Interbank forex rates are affected by many factors and right now the state of the global economy is affecting rates the world over.

What is the LIBOR?

We have all seen the London Interbank Offered Rate (LIBOR) cited in several articles and news items. What is the LIBOR and how does it affect currency markets including the Interbank Forex? Simply put, the LIBOR is a daily reference rate based on the interest rates at which banks are willing to lend unsecured funds to each other in the London money market.

LIBOR Published Daily

The LIBOR is published by the British Bankers Association and is released daily, usually at 11:45 AM (London Time). It is basically an average of interest rates charged by banks for loans ranging from overnight to one year. There are 16 contributing banks and the reported interest is the mean of the eight middle banks. The rates for shorter loans are considered to be reliable and reflect the rates at which banks are willing to lend to each other. The actual rate can vary several times a day affecting Interbank Forex markets.

LIBOR Used as Currency Reference

The LIBOR is used as a reference for the British Pound and other currencies including the US dollar, Euro, Japanese Yen, Swiss Franc, Canadian dollar, Australian Dollar, Danish Krone and New Zealand dollar. The LIBOR is closely watched by Forex traders and investors and has a profound effect on the Interbank Forex market.

When the LIBOR rises it indicates two things, 1. That interest rates in general are rising and thus LIBOR is also rising, and 2. Lending banks believe the banks they are lending to have a higher risk of defaulting on the loan so the lending bank has to charge a higher interest rate to offset this risk.

When the LIBOR is falling it indicates that 1. Interest rates are falling and thus LIBOR is falling, and 2. Lending banks believe the banks they are lending to have a lower risk of defaulting so the bank does not have to charge higher interest rates to mitigate the risk.

LIBOR and Interbank Forex

The interbank Forex market is strongly affected by the LIBOR reports. The LIBOR signifies several rates that are calculated in 10 different currencies and is set every business day. The LIBOR rate is calculated daily for these currencies,

1. Pound Sterling (GBP)
2. United States Dollar (USD)
3. Japanese Yen (JPY)
4. Swiss Franc (CHF)
5. Canadian Dollar (CAD)
6. Australian Dollar (AUD)
7. Euro (EUR)
8. Danish Kroner (DKK)
9. Swedish Krona (SEK)
10. New Zealand Dollar (NZD)

The LIBOR for a specific currency depends on the local interest rate for the currency, such as the Fed rate for the UDS, and banks’ expectation of future rates. The LIBOR is important to markets including the Interbank Forex for a variety of reasons; it is long established, it is a truly international reference rate, it has a wide commercial use, it offers the largest range of international rates, and its mechanism is transparent. The banks providing the data for the LIBOR are the most active in cash markets and have the highest standards and credit ratings.

LIBOR Has Major Influence on Forex Markets

Unfortunately individual investors do not have access to LIBOR data and to receive LIBOR reports must be licensed by the British Bankers Association. The LIBOR is easily one of the most important reports watched by Forex traders and has a major influence in Interbank Forex markets globally.

LIBOR and Loans

Many are unaware of the LIBOR (London Interbank Offered Rate) and how it affects them in their daily lives. The LIBOR is the average interest rate that banks charge when they make short-term unsecured loans to other banks. This, in turn, affects interest rates for such things as student loans, mortgages, and the value of major currencies and is a major influence on the Interbank Forex market. It is essentially the interest rates of 16 major banks averaged out. Approximately 80% of all sub prime mortgages are tied to the LIBOR.

Mortgages Tied to LIBOR Rate

If a mortgage is obtained chances are that the interest rate is closely tied to the LIBOR or other indexes such as the Cost of Funds Index (COFI). Loans are typically pegged to indexes called the one-month, three-month or six-month LIBOR. The rates reflect the averages of what banks are charging for longer term loans and those with adjustable rate mortgages can be in for a very unpleasant shock if rates rise. It is estimated that 60% of all adjustable loans in the US are tied to the LIBOR. Unfortunately most buyers have no idea what the LIBOR is and how it can affect their lives.

LIBOR and Short Term Corporate Loans

The LIBOR is also the benchmark for short term corporate loans. If the LIBOR goes up it impacts a wide range of borrowers including corporations and small businesses that depend on the availability of credit to finance day to day operations. If credit markets freeze or interest rates rise it can directly affect businesses resulting in layoffs and rising prices for consumer goods. The LIBOR also affects the value of various currencies on Interbank Forex markets.

LIBOR Rate and Student Loans

Almost 50% of all lenders peg the interest rate charged to the LIBOR and student loans are no exception. Rates tied to the LIBOR are typically LIBOR+2.80%. If rates go up the loan becomes more expensive and can significantly increase the cost of a college education. The recent credit crunch has adversely affected the availability of student loans. Many economists are telling those with loans tied to the LIBOR to brace themselves for a rise in interest rates.

LIBOR and Interbank Forex

LIBOR has a profound influence in currency markets including the Interbank Forex. The spread between 90 day T-bill and 90-day LIBOR rates can give investors a sense of confidence in the US dollar. When confidence in the US dollar is high the spread will be very close while conversely, if confidence is low the spread will be higher. While LIBOR is primarily about interbank lending rates it can reflect investor confidence in various currencies on the Interbank Forex market.

LIBOR Affects Confidence in the Dollar

If you have a mortgage, have taken out a student loan, or work for a company that depends on the availability of credit, the LIBOR can have an impact on your financial life. The LIBOR helps to determine the confidence that Interbank Forex investors have in the Dollar and helps to determine the exchange rate. Although located in far away London the LIBOR has a direct impact on the daily lives of Americans.

Investors Continue to Buy Dollars

Despite the global economic crisis the US dollar has remained surprisingly strong on currency markets including the interbank Forex. Many Forex traders and investors have continued to buy dollars to avoid risk. The dollar remains the world’s reserve currency and continues to outperform the Euro and the Pound.

Dismal US Employment Figures

All that could change because of recent figures released showing a loss of 240,000 non farm jobs, the largest loss in seven years. The US labor market continues to deteriorate and in the last three months the US has lost 651,000 jobs. This recent information sent shock waves through currency markets including the Interbank Forex. Michael Woolfolk, senior currency strategist at Bank of New York Mellon stated; “The report shows the labor market continued to deteriorate at the start of the fourth quarter and we have to keep in mind that it doesn’t yet reflect much of the job losses on Wall Street.”

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Obama Faces Unprecedented Financial Crisis

US president elect Barack Obama faces an unprecedented global financial crisis and how he addresses the situation may well define his presidency for years to come. Obama faces a national debt in the trillions and his appointees will be charged with overseeing the massive $700 billion dollar bailout program. The actions of the new administration will affect the entire global economy including the interbank Forex market that is responsible for trading over 2 trillion dollars daily.

World Banks Cooperate

The nature of the interbank Forex market can make it difficult to regulate but the global financial crisis has prompted unprecedented cooperation between central banks in Europe, Asia, and the US. According to the “Wall Street Journal Europe” (February 2006), 73% of total interbank Forex volume is done through 10 banks. These banks are names that we all know well, and include Deutsche Bank, UBS, Citigroup and HSBC.

World Leaders Await New Treasury Secretary

World leaders are eagerly awaiting the announcement of a new Treasury Secretary and are hoping that Obama will be capable of guiding the international community through the crisis. Former Domestic Policy Advisor to President Bill Clinton, William Galston stated; “The need for a seamless transition is greater than it has been in our adult political lifetime. With two wars abroad and an international financial crisis going on, there cannot be a period in which the new administration is just getting up to speed.”

European Economic Situation Deteriorating

European banks reported weak earnings and the economic situation is Europe continues to deteriorate. In an attempt to stimulate their economy Germany’s cabinet on Wednesday agreed on a 50 billion euro ($64.22 billion) stimulus package for Europe’s largest economy. In an extremely gloomy prediction Marc Chandler, global head of currency strategy at Brown Brothers Harriman stated; “The forces at work in the global capital markets are very big, bigger than who gets elected president of the United States. People should be prepared for a deep economic downturn in the U.S…”

Dollar Remains Reserve Currency

The dollar is still the world’s reserve currency in interbank Forex and commodity markets and is likely to remain so in the foreseeable future. In a rare piece of good news it was reported that interbank lending costs continued to fall on Wednesday with the rate for three-month dollar funds hitting its lowest level in almost four years. It is hoped that the Obama victory will return investor confident to markets including the interbank Forex.

Low Oil Prices Inspire Confidence

New York stock markets showed positive gains as the lowest oil prices in more than a year inspired investor confidence. The Dow rose 240 points having been down as much as 380 points in the late morning. Stocks were down in morning trading as investors responded to a pair of weak manufacturing reports, Merrill Lynch and Citigroup’s losses and the decline in oil prices. Oil prices continued to decline after the government’s weekly inventory report showed a larger than expected gain in crude and gas supplies. Perceptions of slowing demand have sent oil prices lower than the all time high of July, 11^th.

Fear of Recession Looms

The decline is seen by many as another indication of a global economic slowdown. Despite recent good news there is still a fear of a global recession with some saying the US has already entered a recession. Many analysts say that market volatility is here to stay. Said Gary Flam, portfolio manager, Bel Air Investment Advisors, “To a certain extent, we’re in the middle of a hurricane, “It will pass eventually and we will get through it, but there’s been a lot of damage.” Credit markets remain frozen affecting interbank Forex markets.

Factory Production Lowest in 34 Years

While investors have welcomed recent government actions the negative tone of markets reflect the fact that the effect of many programs will take months to be felt. Recession fears sent stocks plunging Wednesday with the Dow falling 733 points making the session the second worst ever on a point basis. Adding to the bad news the Federal Reserve announced that factory production fell by the largest amount in nearly 34 years. The fall was blamed on the effect of hurricanes Ike and Gustav had on Gulf coast industry. The Philadelphia Fed index, a regional reading on manufacturing fell to an 18 year low. The Index had an original prediction of a decline of negative 5 while the actual figure was a whopping negative 37.5 far exceeding the original forecast. Despite the negative economic indicators the US dollar is still holding it’s own on interbank Forex markets.

TED Spread Hits Record

Lending rates improved slightly with the overnight lending rate falling to 1.94% down from 2.14% late Wednesday. The 3 month LIBOR fell to 4.50% down from 4.55%. The TED spread which is the difference between what banks pay to borrow from each other for three months and what the Treasury pays narrowed to 4.11% from 4.31%. The spread hit a record 4.65% Friday and the wider the spread the more reluctant banks are to lend to each other. This is certainly not good news for credit markets or interbank Forex markets.

Interbank Forex and Lending

Although the performance of markets this week has been hopeful the long term does not look positive. Negative economic indicators and recession fears are looming in the background and psychology plays a big part in market performance. The positive effects of many bailout programs will take months to be felt and investors are sure to be in for a wild ride. Interbank Forex lending is important for Forex traders and markets. Fortunately for Forex investors’ currency does not fluctuate as wildly as stocks and securities and many Forex investors have made impressive gains despite the global economic crisis.

Nationalization Unthinkable

The US prides itself in being one of the last bastions of free enterprise and unfettered capitalism. Until recently the idea of nationalizing banks would have been unthinkable and would be political suicide for any politician advocating nationalization. The recent mortgage meltdown and the ensuing financial crisis have caused even the Bush administration to consider a partial nationalization of several embattled US banks. The partial nationalization of banks is not expected to affect interbank Forex transactions.

The Unthinkable Becomes Reality

After six straight disastrous days of trading stocks gained slightly after an early report that Treasury Secretary Paulson is considering allowing the Treasury Department to take ownership stakes in several beleaguered banks. The banking and credit crisis has surpassed all other economic considerations and the situation became even more serious Wednesday when despite a coordinated rate cut by US and European central banks global markets still experienced losses. Thursday morning (October 9^th) the New York Times cited unnamed Treasury officials who stated that the recently passed $700 billion dollar bailout bill allows the Treasury to put cash directly into the banking system.

It is hoped that the direct injections of cash will persuade banks to continue lending while strengthening the banks balance sheets. The Treasury would also have the right to take ownership positions in the troubled banks. At present the Treasury’s plan is unclear and without details on how the plan would work. It is expected that the plan would be voluntary for banks. Moves by both the Treasury and the Federal Reserve have strengthened the US dollar on interbank Forex markets.

Paulson Speaks

The Fed has already injected billions into all but frozen credit markets and will buy commercial paper that corporations issue to obtain short term loans and cover day to day expenses. In a statement Secretary Paulson said, “Uncertainty and a lack of confidence have clogged our basic financial plumbing. While our actions have been aimed at restoring financial markets and institutions, our purpose is to prevent financial market difficulties from further impacting businesses and families across the country.”

US Dollar Strong Despite Crisis

The current global financial crisis has made the unthinkable a reality. The fact that a conservative administration such as the present one would consider even partial nationalization of any industry reflects the seriousness of the current global situation. It remains to be seen what effect this partial nationalization of the US banking system will have on the US dollar on interbank Forex markets. The dollar has been holding its own against other world currencies despite the global financial crisis. Latest reports have the dollar rising against the Euro. Despite the dismal US economy the dollar is still seen as a relatively safe haven by Interbank Forex traders.

Fed Established By Congress

The US Federal Reserve has been in the news frequently for the last two months but there are many who have no idea just what the Federal Reserve does and what function it serves. Established by Congress in 1913, the Federal Reserve was designed to present the country with a more secure, more elastic, and more stable economic and financial structure. The Federal Reserve is also in charge of monetary policy and the management of banks. Probably the most important function of the Federal Reserve is to regulate the money supply so as to keep production, prices, and employment stable.

Fed Monitors the Economy

The economy is always best when it is growing. People have jobs, businesses are able to produce and the quality of life for the average citizen is better. When the economy is not growing the opposite takes place. Unemployment, a lack of productivity, and a lower standard of living are the sign of a downturn in the economy. The Federal Reserve has been entrusted by Congress to take measures to insure stability and to control inflation and interest rates. The actions of the Federal Reserve have profound effects on global interbank forex markets.

Setting Stable Interest Rates

Both business owners and consumers are concerned about interest rate stability. The US is a credit oriented society and stable interest rates are essential for the national economy to function. Without stable interest rates businesses and consumers find it difficult to plan for the future. The Federal Reserve sets basic bank lending rates and banks pass on any increase or decrease in rates to consumers. The rates set by the Federal Reserve also affect interbank forex lending.

Monitoring the Financial Sector

Maintaining the overall stability of the financial system is one of the top priorities of the Federal Reserve. A stable financial system allows businesses and students to get loans, and consumers to purchase goods and services. When the integrity of the financial system is threatened the Federal Reserve can institute corrective policies. Recently the Federal Reserve pumped billions into the banking system to rescue ailing banks and to ensure the availability of credit on both domestic markets and interbank Forex.

Maintaining A Strong Dollar

The US dollar is the world’s reserve currency and the Federal Reserve is charged with ensuring the stability of the US dollar. A strong dollar is essential for the US economy. Despite the near collapse of the US banking system and negative economic indicators the US dollar remains strong. A strong dollar will significantly contribute to economic recovery in the US and monetary policies set by the Federal Reserve are designed to have that effect.

The Fed and the Bailout

The Federal Reserve has been under immense pressure recently from congress and the public. Testimony before congress by Federal Reserve officials convinced many in congress to vote for the politically unpopular $700 billion dollar bailout bill. After weeks of uncertainty the effects of the bailout are starting to be felt by the financial sector. The dollar is doing well on Forex markets against most currencies except the Japanese Yen. Investors are turning to both the Dollar and the Yen for risk aversion.

In today’s global economy any action by the Federal Reserve can have global repercussions. In this time of volatile markets one can only hope the Federal Reserve continues to make the right decisions. The actions of the Federal Reserve could well affect interbank Forex markets well into the future.