Forces REUNITE!

A surprise intervention by the Fed's to help pull the economy out of a recession and a narrowed trade balance all in the same day?! Wow this seems like a bright day for the Americans but will they be able to enjoy it while it lasts... or will it fail like previous plans?

Teeing off with the trade balance, it seems that the gap for the month of January actually widened as oil prices rose to set new records. The deficit increased by 0.6% to $58.20 billion after December's reading was revised downwards to $57.86 billion according to the Commerce Department.

Of course the positive effect of the weak dollar was the boost in exports by 1.6 percent to $148.23 billion from $145.86 billion marking the largest climb in six months. The poor dollar performance wasn't the sole contributor to this rise, but the expansion and growth of trading partners also played a major role.

Sales of Consumer goods abroad, such as pharmaceutical preparations, increased by $489 million while industrial supplies; such as chemicals and steel mill products, also climbed $804 million. Food, feed, and beverages also went up by $601 million.

The funny thing is that imports also continued to increase despite the slowdown in the U.S. economy which is slowly turning into a recession. The purchase of foreign goods and services rose by 1.3% to $206.43 billion from $203.72 billion.

Oil imports in January were up to $27.09 billion from $24.90 billion and the reason is crystal clear. With oil reaching the $109.00 per barrel level, we might see more spending in the U.S. bill for crude oil imports. As for all other energy related imports, the U.S. paid $35.84 billion up from $32.39 billion. Food and feed imports also rose $324 million.

But now to the moment that you all have been waiting for... the JOINT INTERVENTION! We have seen a similar act in December 2007 as the G-10 central banks pumped money into the financial system to ease the liquidity and ease the credit crunch.

However this time it was different... today the Bank of Canada, The bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank all joined hands to take desperate measures to help the world's largest economy from sinking further.

It went as follows... the Feds announced today a new Term Securities Lending Facility (TSLF) where they will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days opposing the previous overnight term. The primary dealers are a group of 20 banks and securities firms that trade Treasuries directly with the Federal Reserve Bank of New York. These securities are backed by federal agency residential-mortgage-backed securities and non-agency private label residential mortgage backed securities. The TSLF's primary intent is to promote liquidity in the financial markets and ease any credit market turmoil. Similar to the current securities lending program, securities will be available through auctions which will be held on a weekly basis beginning March 27, 2008.

But wait, it doesn't just end here dear reader! In addition, the Feds also authorized an increase in its existing swap lines with the ECB up to $30 billion and the Swiss National Bank up to $6 billion. These swap lines have been extended through September 30, 2008.

The ECB said it will lend banks in Europe up to $15 billion for 28 days as the SNB announced up to $6 billion. The Bank of Canada plans to purchase $4 billion of securities while the BoE will offer $20 billion of three-month loans on March 18 and hold a further auction on April 15.

After this quick act by the Feds, bets placed on a 1 percentage point cut in interest rates by the Feds have been removed and they were back down to only a cut by 75 basis points.

Speculations that the Feds were to act upon the turbulence in the markets and in an attempt to save the U.S. economy from a recession was reflected in the Asian stock markets as most of the indices climbed. The Dollar gathered momentum to gain against all the majors after the announcement of the TSLF.

Desperate measures are taken and honestly... I salute you! The Feds are not giving up on the economy and they're trying many things simultaneously. The Feds meeting is a week from today where expectations of a rate cut is awaited. With all the efforts combined and the joining of hands will the forces of the world be strong enough to put a floor under the sinking dollar?

Dear reader, the upcoming period is going to be one bumpy ride so strap your seat belts and hold on tight...

Crown Forex

Posted in: Economy,Finance and Investment,Forex