Global investors will likely remain wary this week as uncertainty about the credit crisis persists, even after the U.S. Federal Reserve in a rare move on Friday slashed the rate it charges banks on loans and encouraged more borrowing.
The move from the Fed and rises in U.S. markets on Friday lifted Asian stock markets Monday. Japan's Nikkei 225 Average was over 3% higher, Australia's S&P/ASX 200 Index climbed almost 4% and South Korea's KOSPI was nearly 5% higher.
One of the most dominant trading strategies in current markets is the carry trade, in which investors borrow cheaply in one country to buy higher-yielding assets in another. But the spike in volatility and pullback in risk taking has bloodied the popular strategy. The carry trade issue will continue to have an impact on the markets in the next few weeks, with hedge funds scrambling to unwind carry trade positions and also to meet redemptions.
Asian Central Banks Add More Liquidity To Markets
In an effort to keep the financial markets functioning smoothly, soothe investor jitters and
keep rein on policy target rates following a spike in demand for short-term funds as the U.S. subprime mortgage crisis rips through financial markets world-wide, Asian central banks injected more cash into local money markets Monday morning.
The Bank of Japan added 1.0 trillion yen in funds to the short-term money market via its regular morning operation Monday - following an injection of 1.2 trillion yen (US$8.74 billion) Friday - as the overnight key call rate stood above its policy target. Unsecured overnight key call rates are currently around 0.53% to 0.56%, above its 0.50% target, the BOJ said. The BOJ estimates its current account balance is at 10.30 trillion yen and its reserve balance is at 6.20 trillion yen .
Australia's central bank also injected a sizable amount of liquidity into the banking system, seeking to temper upward pressure on some short-term market interest rates.
In its regular daily money market operation, the Reserve Bank of Australia (RBA) added A$3.34 billion (US$2.67 billion) in cash to the banking system. The central bank earlier estimated a deficit of A$3.26 billion for the system on Monday.
The injection compared with A$3.87 billion on Friday and a daily average of around A$2.55 billion last week. Before the recent turmoil in markets led to a drying up of credit, the average daily cash injection was around A$1.8 billion.
The central bank also leant money at rates well below what the market was charging. For instance, it set a repurchase agreement for A$104 million in money market paper for 30 days at 6.62 percent, while the one-month bank bill rate was up at 6.74/6.76 percent.
The RBA had intervened in currency markets to support the Australian dollar late on Thursday New York time. Asked on Monday if there had been any further intervention, a spokesman said the central bank had nothing further to add.