FOREX AM: US Banks To Receive $250 Billion Investment, FX Carry Returns

In a long awaited decision, the US government will infuse cash into the nation’s nine largest financial institutions in attempts to finally break deadlocked credit markets and boost liquidity. The announcement comes a day after European officials pledged the same, allowing for some appreciation in the Euro and British pound over the course of the session. Incidentally, it is also in line with the advice of other industry notables that previously proposed the strategic solution, one that Warren Buffett has implemented himself in recent months. Details of the plan are scheduled to be released when US Treasury Secretary holds a press conference this morning. In general, however, it seems that $125 billion is earmarked for nine of the industry’s largest shops with $250 billion set aside for firms to be decided on by US Treasury official Neel Kashkari, who now oversees the rescue panel. The infusion will also allow the US government to own stakes in the aforementioned institutions, through instruments that will be designed not to dilute current stock holdings. This will allow equity holders in expecting no real damage to currently estimated earnings. Ultimately, the plan should break the recent string of bearishness in the market, creating a bit of confidence in the economy and shift the dynamics of currency pairs back to previous beliefs.

The news has already boosted markets as Asian equity indexes have jumped enormously on the headlines. Most notably has been the Nikkei 225 Index in Japan. The benchmark has recovered by 14 percent in the overnight, helping to foster further gains through Europe. US blue chips are expected to continue yesterday’s run of 11 percent, as futures are pricing in another positive gain for the session. Additionally, traders are seeing a jump in carry trade interest as the Japanese yen continues to slide since making the break of 99.00 last week against the dollar. Recovering to just below the 103.00 psychological figure, USDJPY strength has helped to support gains in the pound sterling against the yen as well, trading above the 181.00 figure. Given current market standing, further strength in risk appetite can be expected as major spreads have narrowed and 3-month Libor has contracted to 4.64 percent.

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