The Fed retreats from the repo market: A catalyst to DXY Rally?
According to the news published on Financial Times; The Federal Reserve is accelerating the pace of its withdrawal from short-term funding markets, even as investors’ demand for the central bank’s cash remains elevated.
The New York arm of the Fed announced on Thursday that it will further cut the size of its interventions in the repo market, where investors exchange high-quality collateral such as Treasuries for cash. It is the latest step in its attempt to wean investors off the funding it has provided since short-term borrowing costs spiked in September.
The new plan reduces the maximum amount the Fed will lend overnight each day from $120bn to $100bn — a change that will kick in on Friday. Moreover, the Fed will limit the amount it will lend in the form of two-week loans to $25bn as of Tuesday, from its current $30bn offering, and pare that amount even further in early March. At that point, the Fed will lend a maximum of $20bn on a two-week basis.
Mr Powell said this week in testimony to Congress that he expects the amount of bank reserves — or cash held at the central bank — to return later this year to a level sufficient to avoid a repeat of September’s cash crunch. It is widely thought that the repo market went haywire five months ago because reserves had dropped too low and banks were holding back from short-term lending.
The Fed has been buying $60bn of short-dated Treasury bills each month to increase the amount of cash in the system, and therefore reserves. Banks currently hold $1.58tn in reserves at the Fed — up from $1.3tn in September.
Demand for the Fed’s cash remains high, however, with the four most recent two-week loans generating demand roughly two times the $30bn that was on offer. Analysts have attributed the elevated amount of bids to the fact that the rate at which the Fed is providing its funding has been relatively low, less than 1.6 percent on average.
Dollar Index, EURUSD, Gold and the U.S. Indices:
How this new state of “lack of cheap cash” may impact the markets?
DXY is being priced at 99.13 as of writing. Technically, the index is in overbought conditions. As seen on the chart, a bearish AB=CD pattern would be completed at 99.35. The psychological resistance: 100. It could be very difficult to break this barrier.
However; the dollar continues to regain strength due to the strong US economy, weak outlook in global economies, real interest rates, perception of risk off, and poor performance of other currencies.
If the bulls can break 99.40 resistance, the targets of the index will be 99.70 100.00 and 100.60.
On the EURUSD side, the picture is clean. We keep our targets unchanged: 1.08000, 1.07400, 1.06800, 1.06200 and 1.04800.
A potential break out of 100 physiological barriers would set a limit to the Gold Prices. Unless it breaks and closes above 1600, we may see a pullback towards 1500 $.
No cheap cash, no happiness. A fresh DXY Rally will be the end of the U.S Indices rally as well.
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