Commercial Paper Fund seen dollar supportive

Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. are reported to have agreed to set up a fund of about $100 billion to help revive the asset-backed commercial paper market.

The new fund, tentatively named the Master-Liquidity Enhancement Conduit (MLEC), is aimed at buying assets backed by mortgages thereby hoping to prevent another sell-off of as significant as that observed in July/August. Such a fund will of course be in the interests of these big banks, who are known to be heavily exposed to the US subprime market, but will provide liquidity as well as stability (even if it be near-term) to the market.

Other banks may join the fund, which would help avoid selling their $320 billion in holdings at fire-sale prices, further roiling the credit markets. The Treasury Department initiated the talks between the banks after a shutdown of the commercial paper market left sellers unable to borrow, forcing sales of about $75 billion of assets.

The sudden increase in borrowing costs for companies and consumers in August threatens to worsen a housing recession that has slowed the pace of economic growth.

The amount of asset-backed commercial paper outstanding tumbled to $899 billion in the week ended Oct. 10, from a high of $1.14 trillion at the end of June, according to Fed figures. The currency impact of this is two fold. First, the fact that this fund is USD denominated means that a confirmation of this fund will provide the USD with a positive boost, notes BNP Paribas. USD/JPY and USD/CHF should face upside pressure. Note also that the fund could see European banks joining. The Times reports that HSBC and Barclays have already been contacted which would add to USD support at the expense of European currencies. Second, given the potential market stability that could emerge from such a fund, high yielding currencies such as the AUD, NZD and CAD are likely to remain outperformers, notes BNPP.