Commercial Paper is Still Locked Up | Forex Technicals

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Commercial Paper is Still Locked Up

Thursday, 13 November 2008 14:50

The USD reversed very quickly today partially based on very positive sentiment in the stock market. A positive stock market is seen as a sign that risk is abating and investor sentiment is becoming more bullish but is that really true? I would suggest that this is not a turning point and that investor sentiment is still markedly bearish and risk averse. Credit market

To make my point I am using the current commercial paper statistics from the Federal Reserve board. The weekly report for total outstanding commercial paper is out and it shows very sharp slowing in the total amount outstanding. Since the Fed began buying commercial paper three weeks ago the growth in that market has slowed from $100 billion in week one to $50 billion in week two and $3 billion over the last week. In order for credit to loosen up in the US we will need to see a lot more volume and a much faster rate of growth. In the video I will go into more detail about this report with a chart.

Second, the difference between high quality commercial paper and low quality paper is still at record highs of over 400 basis points. This indicates that investors still feel that the risk of default in these traditionally low risk investments is very high. Until that differential begins to fall, credit will remain tight and that will constrain the economy. You can see a copy of the chart published by the Federal Reserve Board showing this differential below.

Both of these items are bad for stocks and bad for global risks. That means stocks are in danger and the USD and JPY could bounce back very quickly. The risk of a whipsaw in the forex and stock market is very high right now.

If you need more help understanding the commercial paper market click here for an article and video describing the commercial paper and money markets. You can find part two of this article on the money and commercial paper market here.