Aussie, Euro Rally Post-FOMC As Fed Releases Stress Tests Early

By Christopher Vecchio, Currency Analyst

Today’s Federal Open Market Committee meeting was rather disappointing. After Chairman Ben Bernanke’s cautiously optimistic testimony to Congress on February 29 that hinted the Fed would shy away from more easing, last week’s media-leak that the Fed was considering a QE3-lite (similar to the European Central Bank’s securities market program) raised expectations for today’s decision. Alas, it was the post-decision reaction that drew market participants’ attention.

Approximately an hour before the U.S. cash equity close, JPMorgan Chase & Co. announced that it would be increasing its dividend as well as increasing its stock buybacks. The timing was peculiar but the reason became obvious: the Federal Reserve would be releasing the results of its stress tests on U.S. banks two days early.

With financials poised to rally on the results, the U.S. Dollar sold off in favor of higher yielding currencies and risk-correlated assets such as the Australian and Canadian Dollars. At the time this report was written, the AUDUSD had moved from a post-decision low of 1.0487 to 1.0547 [EDIT: the AUDUSD traded up to 1.0558 after the actual release; chart below updated]. However, U.S. financials were not totally in the clear, with a handful of banks failing the Fed’s tests.

AUDUSD 1 -min Chart: March 13, 2012

Charts Created using Marketscope – Prepared by Christopher Vecchio

At 20:30 GMT, the Federal Reserve revealed that 15 of 19 major banks passed its annual stress test. The results indicated that these 15 banks held sufficient capital to be able to continue lending to households and businesses and meet their financial obligations through times of severe economic and financial stresses.

Total losses amongst the 19 banks are estimated at $534 billion during nine months of a hypothetical stress scenario, which includes a peak unemployment rate of 13 percent, a 50 percent decline in equity prices and a 21 percent drop in housing prices. Under these stress conditions, aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets and incorporates planned capital actions such as dividends, share buybacks and share issuance, falls to 6.3 percent in the fourth quarter of 2013 from 10.1 percent in the third quarter of 2011.

Despite the large hypothetical decline, the post-stress capital levels exceed results from the test results that were conducted during the financial crisis in early 2009, reflecting a significant increase in capital during the past three years.

Federal Reserve Stress Tests Results

--- Written by Christopher Vecchio, Currency Analyst , and Tzu-Wen Chen, DailyFX Research

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