More Swap Lines?

The Fed took further steps to relieve the US dollar crunch on Tuesday and we look at what is happening and why. USD strength is resurfacing today, but gold, silver and GBP remain higher against the greenback. The US ADP employment survey for March dropped to -27K, the lowest since 2017, but economists indicate the worst from Coronavirus hit was far from captured in the report.  Meanwhile, the US March ISM manufacturing index fell to 49.1 vs 45.0 expected, from 50.1. Tuesday's Premium short in the DOW30 is currently +1000 pts in the green. Below is today's weekly Premium video for English speakers, focusing on indices, sectors and gold.

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The Fed added to its USD-swap program on Tuesday, adding swaps for every country that has holdings at the New York Fed. Dollar liquidity is less severe than two weeks about but continued whippy moves in FX suggest that trouble-spots remain.

It's important to remember that the US is a major net debtor with inbound investment exceeding outbound. Lately, foreign firms, governments and central banks need to dollars. Normally they can borrow in USD but those markets have closed so their next option is to sell USD-denominated assets, like Treasuries.

The emerging thinking suggests that any renewed decline in indices may not trigger the same level of USD buying/Gold selling as was seen 2-3 weeks ago due to the highly targeted Fed effors to relieve stress in USD funding.

The Fed doesn't want that so they're stepping up to lend against those assets via swap lines in the hopes that markets will calm and assets won't need to be sold. It appears to be working but it's important to remember that it's not a long-term fix. Unless foreign economies find a footing in the weeks ahead, that selling pressure will resume. Of course, the Fed is buying what they're selling but many of those dollars will be converted to domestic currencies and that will put downward pressure on USD.

Initial jobless claims remains the best real-time look at employment but there are widespread reports of people unable to file because of the huge backlog, especially in hard-hit states.