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CORRECTED-FOREX-Fed debt buying drives demand for risk at the dollar's expense

Published 06/16/2020, 10:53 AM
Updated 06/16/2020, 11:50 AM
© Reuters.
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(Corrects proportion of U.S. corporate debt eligible for Fed
purchase in paragraph 12)
* Fed to buy U.S. corporate debt from Tuesday
* AUD, NZD rise slightly
* Yen settles back to May range
* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E

By Tom Westbrook
SINGAPORE, June 16 (Reuters) - The dollar nursed losses on
Tuesday, after the U.S. Federal Reserve announced it would begin
broad buying of corporate debt, boosting investor sentiment and
appetite for riskier currencies.
The Fed said it will start purchasing a diversified range of
investment grade U.S. corporate bonds on Tuesday in a bid to
secure companies' access to cash and ensure credit market
liquidity amid the COVID-19 pandemic. The announcement dispelled, for now, concerns about a second
wave of coronavirus infections that had weighed on the mood in
the previous trading session.
This drove the risk-sensitive Australian dollar, the New
Zealand dollar and stocks higher, while safe-haven Treasuries
and the greenback fell. MKTS/GLOB
"It's a dramatic turnaround," National Australia Bank head
of FX strategy Ray Attrill said, referring to the shift in mood.
"It just seems to reinforce that message that you shouldn't
and can't fight the Fed here, and everything follows from that
really."
Against a basket of currencies the dollar =USD was steady
at 96.546, almost 1% below Monday's high of 97.396.
The risk-sensitive Australian dollar AUD=D3 sits more than
2% above a two-week low hit on Monday, and rose 0.6% to $0.6968
on Tuesday.
The Reserve Bank of Australia reiterated in minutes from its
June meeting that the national economic downturn may not be as
bad as first feared.
The New Zealand dollar NZD=D3 rose 0.4% to $0.6497, while
the Chinese yuan also rose. The pound GBP= firmed 0.3% to
$1.2637, while the euro EUR= was up marginally at $1.1332.

SUGAR HIT?
The Fed will make its debt purchases from Tuesday in the
secondary market, and said it would also be buying bonds
directly from issuers "in the near future". The combined size of
the primary and secondary programme is up to $750 billion.
Individual investment grade corporate bonds, with a
remaining maturity of five years or less are eligible for the
Fed purchase. That puts about $385 billion of the $10 trillion
U.S. corporate debt universe on the table, according to Morgan
Stanley.
Credit spreads tightened after the Fed announcement and the
yield on benchmark 10-year U.S. Treasuries jumped as traders
favoured risk to the safety of bonds.
But safe-haven currencies such as the Japanese yen JPY=
held firm at around 107.41 per dollar, settling back into a
range held since April, suggesting some investors remain
cautious.
"The key question for investors and traders is whether the
gains represent a change in sentiment or a short-term sugar
hit," said CMC Markets' chief strategist, Michael McCarthy.
Global cases of the novel coronavirus reached over 8 million
on Monday, as infections surge in Latin America and the United
States and China grapple with fresh outbreaks. Later on Tuesday Fed Chair Jerome Powell also testifies
before a virtual hearing of the Senate Banking Committee at 1400
GMT.
British labour market data due around 0600 GMT may offer
clues as to the Bank of England's next move at its Thursday
meeting.
Traders are expecting it will expand its asset-purchasing
programme by around 100 billion pounds ($126 billion).
"The question I have is whether a greater level of QE acts
as a sterling negative or positive," said Chris Weston, head of
research at Melbourne brokerage Pepperstone.
"In theory, it's negative. But FX markets have generally
rewarded currencies where the central bank or government have
gone harder to aid the economy."
($1 = 0.7919 pounds)

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