FED Rate Cut Scenario

Posted at 9:47 PM

Rate cut senario

A rate cut of less than 100 basis points is likely to be greeted with lots of negative sentiment and would be negative for carry-trades and Equity markets. A 100 basis points rate cut on the Fed Funds rate to 2.0% (if seen) would take it below the Fed's preferred inflation indicator...Namely Core PCE price index which was last reported at 2.2%. This means that the Real interest rates would turn negative for the first time since 2003. A negative real rate scenario is generally very negative for $-Yen. The discount rate, which was cut on Sunday, is again likely to cut, in the same magnitude to the Fed Funds rate.

Most Rate Cuts Have Been Met With Negative Knee Jerk Reaction & Moreover Fed Wouldn't Like $ To Become The Carry Trade Currency.

SavantGarde

Just To Add To What I Wrote Earlier, While The Fed Is Doing Everything In Recent Times To Stay Ahead Of The Curve, Market Participants Have Made It Look Otherwise Or Not Enough Having Been Done In A Few Days After Fed Action. Whatever Decsion Is Taken By The Fed Today, Soon After Discussion & Polls Will Start Evolving As To The Future Action By Fed & Thereafter Some Panic Conditions In The Near Future For Fed To Come To Rescue Before The Next Scheduled Meeting.


SavantGarde

Trading The FOMC

We think it's fairly obvious the Fed's going to do what the street wants them to do because the last thing the Fed wants is drive equity markets down further, especially after Monday's global sell-off. The CPI allows them to continue to not think about inflation right now, so the door seems to be wide open. One strategy would seem to be finding a bottom for the Yen and Yen pairs like GBP/JPY in the overnight session on the high probability of the market buying the rumor. Wall Street itself did quite well today, given the circumstances, as the DOW and S&P climbed well off their lows and the DOW finished the day in positive territory.

Steven Gross of Penso Capital Management made a killing buying the Credit Default Swaps of financial firms back in the days when they traded in the low double digits-in his opinion "the investment banks are no longer as attractive an opportunity for betting against." What that tells me (if we are to take him at his word) is that markets could be set for a bit of a rally since the financial's led the market down in the first place.

Looks like USD carry trade is the wave of the future

List below is from one of the spot forex providers

CURRENCY BID ASK DATE
AUD 6.9500 7.3250 Thu Mar 6 14:50:46 2008
GBP 5.2000 5.4500 Thu Feb 7 07:07:10 2008
CAD 3.5000 3.9000 Tue Mar 4 10:31:12 2008
EUR 3.8500 4.1500 Fri Jan 18 17:00:00 2008
HKD 3.2500 3.7500 Fri Jan 18 17:00:00 2008
JPY 0.2500 0.8000 Fri Jan 18 17:00:00 2008
NZD 8.1500 8.6500 Fri Jan 18 17:00:00 2008
SGD 2.5000 3.5000 Fri Jan 18 17:00:00 2008
CHF 2.2000 2.7500 Fri Jan 18 17:00:00 2008
USD 2.4000 2.9500 Tue Mar 18 14:52:32 2008