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Volatility falls alongside dollar as Fed removes cap on QE

Volatility falls alongside dollar as Fed removes cap on QE

Asian markets rebounded on Tuesday following the Fed’s unprecedented ‘Unlimited treasury purchase’ program, which removed the cap of monetary easing in a market that has been badly hurt by dollar liquidity crunch and the coronavirus crisis.

Nikkei 225 Index opened 4.5% higher.

This sets to alleviate pressure on the strengthening dollar and assure investors that the Fed will take whatever measures it can to contain the emerging corporate credit risk. The Fed will become the biggest and perhaps the ultimate buyer of US government bonds, which in the long term will erode the credibility of the US dollar.

US dollar index has fallen for a second day to 102.0 area, from its recent high of 103.0. The Fed’s commitment to inject unlimited liquidity into the treasury and Mortgage Backed Securities will likely weigh on the dollar lower in the days to come, creating a ‘window of opportunity’ for a technical rebound among risk assets – equities, commodities, emerging market currencies and more. Mid-to long term prospects of risk assets, however, might still remain bearish-biased as Covid-19 may stay with us for a longer period of time and its collateral damage is gradually emerging.

US equity indices fell last night though, following the announcement. However, the volatility index has fallen from 74 to 61 overnight, suggesting the selling pressure has somewhat alleviated.

In Singapore, the STI rebounded 3% on Tuesday from its 11-year low of 2,233 points. A technical rebound is perhaps on the way as selling pressure alleviates. A decent rebound will also incentivise short-sellers to close their positions via buying back, therefore exacerbating a rebound.

Volatility Index – Apr 2020

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