Morning Commentary: Everything and the Kitchen Sink

Foreign Exchange - Morning Commentary
Everything and the Kitchen Sink
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Yesterday, the Fed launched a Commercial Paper Funding Facility (CPFF).  This is similar to a facility that was launched in 2008 after the Lehman crisis and is designed to ease the liquidity concerns in the commercial paper market.  The one key difference between the 2008 plan and the current plan is that the 2020 plan is backed by $10 billion of credit protection from the Treasury’s Exchange Stabilization Fund (ESF). 

This aspect of credit protection is a critical component of the CPFF.  In order to create this new facility, the Fed used powers given to it by Section 13-3 of the Federal Reserve Act which allows the Fed to lend to nonbank entities under “unusual and exigent” circumstances.  However, this is only allowed if it doesn’t put taxpayer money at risk.  These restrictions were enhanced by the Dodd-Frank Act, making the ESF’s protection critical to keeping the CPFF compliant to the Federal Reserve Act.


On a broader level, this creativity from the Fed suggests that additional creative solutions utilizing the ESF could be on the way.  Excluding the amount encumbered by the CPFF, the ESF still has ~$83 billion of fund available for credit protection.  Should this be used for credit protection, it could be leveraged up to much higher amounts and greatly expand the Fed’s ability to support the economy. 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The US Administration unveiled a $1 trillion package that includes loans and direct checks to Americans.  The direct cash part of the proposed package totals around $500 billion and will put money in Americans’ pockets much faster than a payroll tax break.  This amount is in addition to the tax payment deadline extension of 90 days that is estimated to be around a $300 billion bridge loan.  In total, the estimated direct stimulus being discussed totals around 6% of GDP.
  • Canada is expected to announce the details of its much-anticipated fiscal stimulus package today with the total amount of stimulus expected to be around 1% of GDP.  The key feature should be direct help for vulnerable households with assistance provided through existing programs such as employment insurance.  Today’s package will build on other programs previously announced.    
  • Germany has also announced significant domestic fiscal stimulus, including the possibility of issuing joint EU debt.  Joint EU debt was brought up by the Italian PM and rather than reject it out of hand, Merkel said that the Germans should explore it.  Until now, fiscal programs have been on a country by country basis.  Issuing joint debt would be a step closer to a fiscal union.
  • The UK government and the BoE came out with a massive and coordinated assistance package that totals around 15% of GDP.  The package will provide support for airlines, the hospitality industry and other business through government backed loans.  With regards to EU trade negotiations, the expectations firmly remain for an extension to be officially announced with talks suspended due to the ongoing crisis.   
  • Spain, France and Poland were among other countries that also stepped up with measures to support economic activity. 
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