Central Banks intervening to ease severe liquidity shortage.

September 18, 2008

Overnight U.S. dollar funding costs fell to 2 percent as of this hour after central bank action, 4 am New York time, compared with around 5 percent yeasterday in Europe and as high as 8.5 percent in early Asian trading today. Traders in Singapore and Malaysia said while overnight U.S. dollar funds were quoted between 6 and 7 percent, some deals took place at levels as high as 8 and 8.5 percent.


Central banks across the world are finally pumping massive amounts of liquidity in the short term markets in order to ease the recent unprecedented collapse in credit markets.


South Korea’s central bank is injecting dollars into the local dollar/won swap market as it is facing ‘an excessive imbalance’. Bank of India intervened to stop dollar’s rise against the rupee. Hong Kong’s central bank injected HK$1.556 billion (US$199.5 million) into the interbank market as short term funding tightened and the Hong Kong stock market fell more than 7 percent.


The Fed has doubled the amount on offer through its swap lines to the major central banks of the world, and the total amount has been quadrupled, as short term dollar funding activity is frozen. The doubling appears to have been an arbitrary choice, essentially a jump to the largest near integer to deal with the massive and sudden vacuum in the credit markets in general.


Excerpts from Fed’s Statement of 3 am New York time:


“Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets.”


“Federal Reserve Actions


The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks.


The FOMC has authorized increases in the existing swap lines with the ECB and the Swiss National Bank. These larger facilities will now support the provision of U.S. dollar liquidity in amounts of up to $110 billion by the ECB, an increase of $55 billion, and up to $27 billion by the Swiss National Bank, an increase of $15 billion.


In addition, new swap facilities have been authorized with the Bank of Japan, the Bank of England, and the Bank of Canada. These facilities will support the provision of U.S. dollar liquidity in amounts of up to $60 billion by the Bank of Japan, $40 billion by the Bank of England, and $10 billion by the Bank of Canada.

All of these reciprocal currency arrangements have been authorized through January 30, 2009.”


All these banks are announcing overnight repos around now.


Update: Central banks have been acting through morning and noon.


After central bank injections, overnight dollar is down to 3.84% today 7am New York time, from 5.03% yesterday. However, three month dollar libor is still climbing, to 3.20% from 3.06%.


Later, through 9 am, New York Federal Reserve added a combined total of $105 billion of temporary reserves to the banking system through repos, exceeding the biggest day’s combined total in September 2001. Overnight rates finally settled around three percent.




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