fundamental alert

Fed Rate Cut Spurs Increased Appetite for Risk Despite Ongoing Weakness in the Credit Market

Thursday, 30 October 2008 07:57:06 GMT  |  DailyFX Research

The Fed delivered a 50bp rate cut yesterday as widely expected, and we have seen tentative signs of risk taking - a notch up from a mere abatement in risk aversion - emerge in the stock markets. This backdrop has kept the low yielding USD and JPY currencies under pressure, particularly to the continued benefit of commodity and emerging nation currencies. However, expected rate cuts from both BoE and ECB, which have considerably greater scope to cut interest rates than either the Fed or BoJ, should limit upside potential in GBP-USD and EUR-USD. Also, the health of credit markets remains a nagging concern. Even though USD and other currency Libor rates have come down this week as the various U.S. Treasury programs start to come into effect, Libor-OIS and the TED spread - the key gauges of private lending confidence - have in fact widened. The TED spread has edged out to 288bp, its widest in 10 days, suggesting that policymakers have not found their way out of the woods yet. Any disappointment in today's U.S. Q3 GDP and initial claims data could see things get ugly again in markets.

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