Asian Central Banks Add More Liquidity to Markets

The Bank of Japan and the Reserve Bank of Australia Monday injected more cash into local money markets even as regional stock markets rallied after the US Federal Reserve Friday cut its discount rate.

The injections suggest that central banks in Asia remain determined to keep the financial markets functioning smoothly, soothe jumpy investors' nerves and keep a lid on their policy target rates following a spike in demand for short-term funds as the US subprime mortgage crisis ripped through global financial markets in recent weeks. The surprise move by the Fed, which cut the discount rate charged on direct Fed loans to banks to 5.75% from 6.25% and encouraged US banks to tap loans at the "discount window" sent a strong message that global central banks are taking the crisis seriously. The Fed usually only encourages banks to use the discount window in emergencies when banks can't get funding elsewhere. Central banks in Japan and Australia appeared to seek to drive that message home. The BOJ added Y1.0 trillion in funds to the short-term money market via its regular morning operation Monday - following an injection of Y1.2 trillion Friday - as the overnight key call rate stood above its policy target. Unsecured overnight key call rates are currently around 0.53%-0.56%, above its 0.50% target, the BOJ said. The BOJ estimates its current account balance is at Y10.30 trillion and its reserve balance is at Y6.20 trillion. The RBA bought a total of A$3.34 billion in securities, focused on the short end, following its estimate of a daily financial system deficit of A$3.26 billion, resulting in a net injection of A$800 million. That followed a slight drain on Friday. ICap Chief Economist Matt Johnson said the RBA's emphasis on buying short-end bills suggests that the central bank's focus remains on getting market rates to normal levels. After their vicious selloff last week, stock markets in Asia bounced sharply Monday morning, following gains on Wall Street Friday on the Fed's move. The yen, which late last week logged its biggest one-day rise against the US dollar since October 1998 as traders dumped higher-yielding currencies they purchase with borrowed yen, also softened a bit Monday morning, suggesting aversion to risk was abating slightly. But investors cautioned against reading too much into one or two days of stability in the markets. JPMorgan Chase Bank currency strategist Holly Huffman warned that unwinding of yen carry trade positions against the New Zealand dollar, Australian dollar and other higher-yielding currencies still had room to run. "Despite the Fed's shift to an easing bias, markets remain very unsettled, and we expect this to remain the case for the next several weeks as the market evaluates the likelihood of a Fed ease at the September meeting, which we expect," Huffman wrote in a note to investors.