MUFG: Fed delivers further policy support ahead of FOMC meeting

April 28, 2020

The US dollar has stabilised at lower levels during the Asian trading session following yesterday’s sell off. The commodity-related currencies of the Australian dollar and Norwegian krone have outperformed at the start of this week despite continued weakness in the oil market where the price of Brent has fallen back below USD20/barrel. 

Fed expands support for the Muni market

It has been a remarkable reversal of fortunes for the Australian dollar in particular over the past month as it has almost retraced all of last month’s sharp decline when it hit an intra-day low of 0.5510 on the 19th March. The US dollar has been the worst performing G10 currency since the 19th March. It does suggest strongly that the Fed’s aggressive easing efforts are helping to weaken the US dollar. The Fed announced a further policy update last night ahead of tomorrow’s FOMC meeting. The policy statement revealed that the Fed has acted to expand the scope and duration of the Municipal Liquidity Facility. The USD500 billion emergency lending program aimed at providing short-term credit to state and local governments. 

Population thresholds under which counties and cities would be eligible to sell shortterm debt to the facility have been lowered to at least 500k for counties and 250k for cities down from 2 million and 1 million respectively. According to Bloomberg, it will allow substantially more entities to borrow directly from the MLF including Atlanta, Miami, Baltimore, Boston, and New Orleans. The term of this financing has also been expanded to three years. On the other hand the Fed has introduced a new requirement that the borrower has to be investment grade rated on the 8th April. Overall, the Fed has taken further steps to help ease financing pressures for municipalities which if left unaddressed could undercut the impact of fiscal stimulus at the federal government level. The timing of the new policy announcement coming just ahead of tomorrow’s FOMC meeting is somewhat unusual, and perhaps suggests it wants a different focus at tomorrow’s meeting. The Fed had already announced at the end of last week that it would continue to slow the pace of daily US Treasury purchases to USD10 billion during this week down from USD15 billion last week. It marks a further slowdown from peak daily purchases last month of USD75 billion and is in response to improving market conditions.