The Morning Takeaway: Assessing the Legal and Political “Meteorology” of Foreign Exchange
Humans have no need to come in contact with each other but for the exchange of value. How the value deemed from interaction is determined will be based on an individual assessment of how much benefit is to be gleaned from what another has to exchange.
Determining the benefit of what another party has to exchange means incurring costs for gathering information. The more cogent and clear the better. Efforts are optimized and the information gathering becomes efficient. Understanding the environment producing the information is important. The environment places parameters on any information obtained. The environment within which the information is produced may lack characteristics necessary for producing the clearest information possible.
The value that is being exchanged also contains information about the environment it is coming out of. Take corn or any other agricultural commodity. For optimal growth, the environment that produces corn should provide a certain quality of soil, nutrients, water, and weather to create a quality yield. What is yielded should be able to provide you with information on the quality of soil, nutrients, water, and weather from whence the yield came.
This same approach should be taken to another commodity, currency. The “soil’ for this commodity is a nation’s central bank and to a lesser extent the commercial banks that act as distribution channels for the currency. The “soil” is impacted by the “weather” and “climate” generated by the level of transactions occurring within multiple markets in the political economy. These transactions deliver “rain” onto the soil and impact the yield in currency released into the political economy’s blood flow. And just like a corn crop can provide the farmer or the end user information about the environment that spawned the yield, so to can currency, or specifically, currency price movements, provide the trader with information about the central bank environment.
For the trader, it is important to assess the legal and political “meteorology” of the central bank environment. Without these assessments, the trader, whether purchasing currency tails for speculation or as part of an international business transaction, risks not capitalizing on the yields that foreign exchange can bring about.
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Exchange rates of interest as of 11:45 am AST
|Currency pair||Exchange rate|
Rates reported by the Federal Reserve (Release Date 16 July 2021)
Effective Fed Funds Rate: 0.10%
Discount Window: 0.25%
Prime Bank Rate: 3.25%
3-month Treasury bill: 0.05%
6-month Treasury bill: 0.05%
1-year Treasury bill: 0.07%