Currencies Soar as Fed Announces More Stimulus, GDP Not as Bad as Feared

The US is now in a technical recession but that has not stopped the equity and currency market from rallying. The GDP number was not as bad as the market had feared but what really drove the markets higher was the Federal Reserve’s new Term Asset-Backed Securities Loan Facility [TALF].

Both the outgoing and incoming Presidents are stepping on the gas and that is helping to restore investor confidence. President Elect Barack Obama has formed his Economic Team and is outlining his Economic Stimulus plan. The Bush Administration, bailed out Citigroup yesterday and has now made a colossal announcement aimed at putting a bottom in the asset market.

Their 35% increase in the Fed balance sheet represents another $800B worth of stimulus and will cause the Fed’s balance sheet to balloon to $3 trillion. For investors that have been concerned about the funding crisis, this is an even bigger reason to sell dollars.

Here is what the Fed announced minutes before the GDP number:

– New $200B facility to support ABS
– Buy up to $500B in mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae
– Buy up to $100B in direct obligations of housing related Government Sponsored Enterprises
– The Treasury will use $20B of TARP funds to provide credit protection to the Fed

Expect GDP Growth to Worsen

The 0.5% drop in GDP is mild when compared to past recessions and raises the risk of a sharp decline in fourth quarter GDP. Many people believe that the current downturn is the worst since the Great Depression and if that is true, we could easily see GDP fall by 4 or 5 percent in one quarter. In 2001, GDP contracted by 1.4 percent in the third quarter. In 1990, GDP fell by 3 percent in the fourth quarter and in the first quarter of 1982 GDP dropped a whopping 6.5 percent. There is no reason why the worst case scenario this time around is just a 0.5 percent contraction in GDP.

Remember That This is a Crisis of Confidence

However despite the pessimistic outlook for growth, it is important to remember that this was a crisis of confidence. So priority number one for the outgoing and incoming Presidents is to restore confidence. Since Friday they have done a good job with that if Obama outlines more plans at his speech later this morning, we could see the rally in the currency market continue. Don’t forget that the further monetary stimulus is also in the pipeline with the Fed expected to cut interest rates again next month.

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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