Global central banks send in the USD liquidity cavalry

More John J Hardy, 30 November 201130 November 2011 Non-Independent Investment Research Global coordinated central bank intervention is the order of the day as Fed and five other central banks lowered the interest rates on dollar swap lines. Risk goes bananas as interventionists win another tactical battle.

We thought that the special report of the day would be about the PBOC moving to lower the reserve requirement ratio by 50 basis points on Dec. 5, clearly touching off the first change in policy direction since the beginning of last year. But then, within a couple of hours we get the news that the Fed and five other central banks (BoC, BoE, ECB, BoJ and SNB) would lower interest rates on USD swap lines from the dollar overnight index swap rate plus 100 bps to plus 50 bps. This was clearly in response to the emergency liquidity pressures on European banks, where the symptoms of the strain were evident lately as the Euro basis swaps heading as low as -162 bps today – by far the lowest since the global financial crisis, when they never closed a week of trading below -150 bps (though they were lower at times intra-week).

Considering the extraordinary tension of late across markets, the news understandably unleashed a frantic bout of short covering, with one of the more memorable instantaneous spikes in recent market history unfolding. AUDUSD managed about 1.0330 after trading 0.9950 before the initial move higher on the PBOC  (this is the reason I end nearly all of my publications with the reminder for everyone to “stay careful out there”. The lesson learned today is that extreme fear will always mean two-way risks: because whenever lots of fear is priced in – a market reaction AGAINST the fear can become very violent in the shortest term when intervention suddenly arrives on the scene as we see today.)

Odds and ends
The central bank intervention came just ahead of the release of the US ADP employment change report, which showed a “robust”