Interbank Market News Scan: Expecting GBP-USD to top 1.3780, but asking why would I want to buy the British pound?

The GBP-USD currency pair has, at the time of this writing, an exchange rate of 1.3812.  Analysis conducted by FXStreet has support for future increased price movement between 1.3640 and 1.3800 and resistance to price increase anywhere between 1.3840 and 1.3900.  Retail traders are more bearish on the currency pair’s price movement which, from what I gather from the analysis, may be contributing to GBP-USD breaching and staying above 1.3800.

Although, as a binary options trader, I focus on what exchange rate a pair will close out at by the end of the day meaning that what little profit I make is based on getting the price movement call correct, I share with most retail traders the desire to see a currency pair climb.  I will always cheer on the attainment of profit because profit equates to the income the trader needs in order to maintain a roof over her children’s heads.  But given the mostly gloomy news out of the United Kingdom, I have been asking myself, why would anyone want to buy the damned pound?

According to data from the Bank of England, inflation in the UK is running at 3.1% while the UK’s Office of National Statistics has gross domestic product growing at an annualized at 5.5%.  The UK government’s ten-year bond is yielding 1.18% and unemployment is at 4.5%.

Contrast UK performance with the United States and at first blush you wonder why exchange US currency for UK currency unless you just need a getaway to visit relatives in London.  The US is experiencing a rate of inflation more than twice the Federal Reserve’s 2% target (5.4% to be exact); is enjoying 6.7% growth in gross domestic product; and has ten-year government bonds yielding 1.65%. 

If anything, it would appear that a trader would borrow pound and make a few bets in the States.  This relative dollar strength may be what is keeping the 1.3800 lid on the GBP-USD.

In the meantime, I am thinking of conducting a comparison of UK consumer baskets to US consumer baskets.  I never hear anyone in the media make this type of comparison.  I think such a comparison would add to the discussion. Let me know what you think.  

Alton Drew

21.10.2021

Interbank Market News Scan: Trading within your time reality

Beginning traders are told time and time again to keep their emotions out of a trade.  It is nerve racking to sit in front of a screen and watch Japanese candles change in color, width, and height as you second guess your trade.  It makes no sense torturing myself like that.  It tells me that I am questioning my homework or lack thereof and if that is the case, I need to work a little harder on analyzing all available data before I pull the trigger on a trade.

Making the above observation, I see why it is important to keep your trading plan and trade journal handy.  Your plan keeps you grounded and disciplined. You put time and thought into writing it. You may as well follow it, knowing that as you amass more experience and knowledge that eventually the plan will be modified. In the meantime, however, like any good athlete, you don’t want to make any changes in the game plan while in the heat of battle.  In the heat of battle is not the time to practice.

When it comes to time constraints, for those of us who are funding our trading desks ourselves, getting out of our comfort zones and trading in sessions that are not in our time zones is a “blessing.”  As I shared in my last blog post, I dipped my toes in the Asian session by trading the dollar-yen for the first time.  My business trade during the day influences when I can do my day trade in binary options.  Taking advantage of the 24/5 nature of the foreign exchange markets means there is always an opportunity to make a return. 

Alton Drew

19.10.2021

Interbank Market News Scan: Dipping my toes into the USD-JPY market

For the past week or so I have been trading the binary options in the GBP-USD market.  I focused on this market primarily because the US and UK sessions intersect during the first few hours of the American session allowing me some time to do some reading and research before making a trade.  Time spent on another project, however, meant missing the opportunity to trade during those sessions, so I decided to dip my toes into the Asian session.

I admit to having had some hesitancy toward trading during the Asian session.  I am less familiar with Japanese monetary policy and the yen.  Their central bankers get a lot less play in the business media than central bankers at the Federal Reserve, European Central Bank, or the Bank of England which means reduced insights into Japanese monetary policy.  But I find that there is upside that can result from fear: the ever-present opportunity to learn.

The first stop in taking an opportunity to learn included a visit to the Bank of Japan’s website where I identified data on the BOJ’s overnight bank rates.  I then compared these rates with the overnight bank rates of the Federal Reserve.   Banks with accounts at the Federal Reserve are getting much better rates than those with accounts at the BOJ.

The business media has been reporting on Japan’s sub-zero rate policy for years, heck decades, so there was no surprise on my part when Bloomberg data showed the wide difference in rates between the U.S. and Japan.  The 150-point spread between U.S. 10-year government bonds and Japanese 10-year government bonds supported in my mind opportunities for those holding yen to move to the dollar thus increasing dollar demand and driving up the exchange rate between the two currencies.

Business media, in my opinion, paints the USD-JPY pair as volatile which I guess can cause some trepidation for traders trying to guess where the exchange rate is going to go.  I am growing increasingly suspect of most business media.  I see them more as purveyor of narrative instead of distributor of fact.  They are as noisy as their political media cousins and contribute to the noise and trepidation I mentioned earlier.

Fortunately, there are outlets such as Daily FX and FX Street that provide analysis that cuts through the noise. Using analysis from these outlets I was able to establish a probable floor of USD-JPY=112.00 and a probable ceiling of USD-JPY=113.50, betting that during a four-hour contract the exchange rate would exceed 113.20 prior to the contract’s expiration.

My biggest takeaway from last night’s trade was one should not allow fear and lack of knowledge to limit the opportunity to profit.  Seek out good information sources and pursue a path of knowledge.  Knowledge helps to process out the fear.

Alton Drew

12.10.2021  

Elizabeth Warren’s “dangerous man” moment should not impact traders, but traders should determine if she has the votes…

Assuming President Joe Biden nominates Jerome Powell as chairman of the Board of Governors of the Federal Reserve System, Mr Powell will need a simple majority in the U.S. Senate to support his confirmation.  In 2018, Mr Powell was confirmed via a Senate vote of 84-13 which meant that a number of Democrats also voted to support him. Among those dissenting was Elizabeth Warren, Democrat of Massachusetts, who yesterday made it clear that she would not support his nomination in 2022.

Yesterday, during a Senate banking committee hearing, Mrs Warren expressed her belief that Mr Powell is making it too easy for large banks to take on big risks.  “The Fed chair should be like a sentry, standing at the gates, making certain that banks are not loading up on risks that could take down the entire economy,” Warren told Bloomberg News.  Mrs Warren went as far yesterday to mention Archegos Capital, the family office who exposed a number of banks to losses due to bad bets made by the family office.

That Mrs Warren would vehemently express her intent not to support Mr Powell (referencing him as a “dangerous man”) tells me that she has already received signals from the White House that Mr Powell will be nominated by President Biden.  The Secretary of the Treasury, Janet Yellen, has expressed her support for Mr Powell and it is likely that he will garner a large majority of Republican support and the support of a sufficient number of Democrats.  I believe this support will be provided in part to push back against the progressivism in the Congress, particularly in the House of Representatives.

Mrs Warren has not made any compelling arguments regarding the market forces that impact foreign exchange. There has been no discussion from her camp regarding relative income changes, product availability, relative interest rates, or speculation between the U.S. and other countries; market force observations that are of greater importance to traders and central banks.  Such arguments, if substantiated, would have probably swayed support to her position among more senators (maybe), but we will never know.

Mr Biden’s rare smart play will be to nominate Mr Powell thereby providing the interbank market with increased certainty as to monetary policy.  Regarding Mrs Warren, this may be just another “meh” moment.

Alton Drew

29 September 2021

The impact of Build Back Better on the interbank market will be reduced by increasing likelihood Democrats failing to come together on its passage… And Jerome Powell may benefit

According to the Tax Foundation, a public policy think tank, President Biden’s proposed “Build Back Better” plan will generate government revenues of $2.1 trillion over the next ten years.  After accounting for approximately $1 trillion in tax credits for individuals and businesses, the Tax Foundation estimates the US government will net just over $1 trillion in revenues over the ten-year period.  This amount can be whittled down further by accounting for tax revenues recovered from increased compliance activity bringing the estimated bottom-line amount generated to $862 billion.

The economic price for the proposal, according to the Tax Foundation, would be a decrease in long-run gross domestic product by .98%; a reduction in capital stock of 1.84%; a wage rate reduction of .68%; and net loss of 303,000 jobs.

Meanwhile, the Committee for a Responsible Federal Budget, a public policy think tank, estimates that after accounting for offsets and expiration of a number of programs, Mr Biden’s “Build Back Better” plan will require financing of another $2.9 trillion of debt.  The Committee estimates that interest on new debt may be $1.1 trillion by 2031.

Today, the yield on the ten-year Treasury note closed at 1.48%, according to data by Bloomberg, after getting as high as 1.50%.  It is unclear whether the increase in rates accounts for passage tax increases and social welfare spending contained in the “Build Back Better” plan.

The future economic impact from this plan appears to be flat over the next ten years.  A .98 percent reduction in economic growth over ten years is negligible.  So is a loss of 303,000 jobs.  In addition, Speaker Nancy Pelosi is signaling to the progressive wing of the Democratic Party that they may have to settle for a plan that falls short of $3.5 trillion.  If the bill fails in the House, not only is impact a moot concern, but the Democrats and Mr Biden will see a further drop in their political capital where their constituents see them as incapable of delivering on big ideas.

If the package fails, I can see some upside for Jerome Powell, current chairman of the Board of Governors of the Federal Reserve.  Mr Powell’s tenure as chair ends in February 2022.  A failed Biden economic passage brought on by a fractured party may mean that Mr Biden will have to take any opportunity to infuse confidence in the American economy.  So far, the Federal Reserve has been that one constant.  Mr Biden may have no choice, especially going into the mid-term election campaign season, but to re-appoint Mr Powell to another term as head of the Fed.

Alton Drew

27 September 2021  

An importer wants to short the dollar …

Tywin Lannister decides to invest in the import/export business.  He wants to import certain goods from the United Kingdom and resell them in the United States.  He estimates that he will need 7.5 million British pounds (GBP) to purchase, package, process, and deliver his British goods to the U.S. 

At an exchange rate of $1.3740 per British pound, he estimates borrowing $10.305 million from his US bank.  The borrowed amount also includes his estimated profit.

To sweeten the deal with the prime brokerage division of his bank, he offers up $1.05 million dollars in cash and securities as collateral.

Lannister’s business venture so far in Great Britain is a success.  His take comes in (for the purpose of this discussion) at the estimated 7.5 million GBP which also includes his profit.  He would not mind expanding his profit so he hopes that the dollar weakens or depreciates. Fortunately for Lannister the dollar price of a pound has increased to $1.5801.  After converting his pounds to dollars, he realizes $11.85 million, and after repaying his loan, he takes home approximately $1.54 million in profit from his venture.

Lannister likely benefited from a number of market forces.  For example, incomes in the US may have been increasing faster than those in the UK thus increasing demand for the UK’s exports and currency.  The UK’s currency appreciates versus the US.

Prices in the US may have been rising rapidly when compared to prices in the UK. The resulting demand for lower priced UK products would have resulted in an appreciation of the UK’s products and currency.

In addition, interest rates in the UK may have risen higher than in the US, incentivizing the movement of money from the US to the UK resulting in an appreciated UK currency.

A trader’s sound monetary policy strategy will emphasize interest rate moves, but will not discount to zero the other market forces that impact currency values.  Lannister no doubt kept his eyes on all the factors, but given that a central bank is the “farmer” of its nation’s respective currency, Lannister, and any other importer, will pay close attention to the interest rate actions (monetary policy) of its central bank.

Alton Drew 23 September 2021

Interbank Market News Scan: Nothing from the European Central Bank indicates the EUR-USD won’t stay flat …

The EUR-USD market …

The EUR-USD was trading around 1.1813 about 10:00 pm EST and I read nothing out of the European Central Bank this week that could impact the interbank market today.  The most recent comments out of the ECB regarding the European economy came during a speech by Isabel Schnabel, a member of the ECB’s Executive Board.

Ms Schnabel’s general assessment was that the economy is brightening for the Euro area and although Covid-19 is resurging, consumers and businesses appear upbeat about future economic performance.  Inflation, the universal economic buzzword, is at 3% per an August print, thus exceeding the ECB’s two-percent target rate.  Inflation, according to Ms Schnabel, is likely to keep growing through the end of 2021.

Meanwhile, real interest rates in Germany remain in the negative.  The rate for the ECB deposit facility is at -.50%.  This is the policy rate at which bank excess funds are deposited overnight with the ECB.  Banks, in essence, are paying the ECB to hold their excess funds.  

Contrast the ECB rate with the overnight interbank rate (fed funds rate) of the Federal Reserve which currently has a target rate of 0 to .25%. 

Ms Schnabel warned against premature tightening of rates.  She noted that while inflation may increase through the rest of the year, it may abate around the beginning of 2022.  She also cautioned that while inflation appears high, the economy is coming off of a pandemic-induced slow down and in real terms inflation is still low.

Ms Schnabel was kind enough not to use the word, “transitory.”

Otherwise, the ECB so far has been mum. So has the Federal Reserve as it gets ready for its Federal Open Market Committee meeting on September 22-23.  

Ms Schnabel’s comments also did not veer off from last week’s monetary policy decision to maintain the ECB’s €20 billion in monthly asset purchases while modifying the pace at which the ECB would make asset purchases.

Data from OANDA has the EUR-USD flat lining since 14 September but also reflecting a slight raise in the exchange rate since Ms Schnabel’s speech. While I do not expect the rate to fall below 1.1800, I don’t see an argument for now as to why the exchange rate will not continue to fall below 1.1800 by month’s end.  Like everyone else, I do not have a crystal ball.

Please support my efforts by making a donation via PayPal or visiting our advertisers.  Also, share with me what you think about the above analysis. The more info, the better.

Interbank Market News Scan: The Bank of Canada held its policy rate today, but I was nervous about USD-CAD

The Bank of Canada today held its policy rate at .25% citing the effectiveness of its quantitative easing program which is currently comprised of asset purchases of CAD 2 billion a week. While seeing a recovery in its economy, Covid-19 and supply chain disruptions were noted as the usual suspects for dampening of economic growth in certain sectors.

The Bank noted contraction in its export sector, in particular its auto industry with consumption, business investment, and government spending contributing to Canada’s economy.  Inflation is running around 3.7%, much hotter than its 2% target.

From a yield and inflation aspect, I could not see why Americans would want to move dollars into Canada’s economy.  Granted U.S. inflation, at 5.4% over the last 12 months, is running hotter than inflation in Canada.  However, according to data from Bloomberg, ten-year treasury yields are higher in the U.S. (1.35%) than they are in Canada (1.21%).

Yesterday, data from Reuters showed the USD/CAD closing around 1.2621 and I quite frankly thought (in my gut) that the exchange rate would decrease by 11:00 am EST but decided to hold out for the Bank of Canada narrative on rates.  I did not see much change in this report versus last month’s monetary policy release.  I also did not see any calls for changes in monetary policy which added support, in my opinion, to an expected increase in USD/CAD.

The takeaway for me is there is nothing wrong with listening to your gut but always challenge the feeling with data and vice versa. 

Please feel free to share thoughts on central bank decisions and foreign exchange.  

Happy Star Trek Day!

Alton Drew

8 September 2021

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Interbank Market News Scan: I expect that the GBP-USD will continue inching up

As of 10:03 am EST, I haven’t seen any news out of the Bank of England discussing modifications to findings in its August monetary policy report.  The current bank rate set by the Bank of England is 0.1% with a target rate of inflation at 2.0%.  The Bank of England currently purchases GBP895 million in government bonds in an attempt to keep borrowing rates low for consumers and businesses. 

The Bank of England expects inflation to continue rising over the Bank’s current 2.0% target for the next two years before falling back to the target.

OANDA reports a .41% increase in the GBP-USD exchange rate between 30 August and 7 September with an exchange rate of 1.3839 as of 10:03 am EST.  As of 10:17 am EST, Reuters reports an exchange rate of 1.3780 while Bloomberg reports an exchange rate of 1.3787.

There is a hearing scheduled at 11:00 am EST on 8 September 2021 to discuss the Bank of England’s August monetary policy report.  The London market closes today at 11:30 am EST.    

Alton Drew

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Interbank Market News Scan: China tightens regulations on foreign exchange market….

5 September 2021

Interbank. Chinese officials to tighten foreign exchange market supervision. https://www.forexlive.com/centralbank/!/chinese-officials-to-tighten-foreign-exchange-market-supervision-20210905

Interbank. Nigeria. Naira. Former Deputy Governor of Central Bank of Nigeria(CBN), Dr Obadaiah Melafia weekend attributed the dip of the naira in the foreign exchange market to the bad policies of President Muhammadu Buhari’s administration and the tensions across the country. “Nigeria is a failed state.” https://www.vanguardngr.com/2021/09/dip-of-naira-in-foreign-exchange-market-due-to-buharis-bad-policies-mailafia-alleges/

Interbank. Forex. So what fundamentals are impacting the foreign exchange markets? https://finance.yahoo.com/news/introduction-major-fundamental-influences-forex-080046373.html

Interbank. India. India’s management of foreign exchange reserves results in supporting 18 months of imports. https://www.deccanherald.com/opinion/panorama/management-of-foreign-exchange-reserves-1026066.html

Interbank. Russia. Russia’s central bank provides alternative economic forecast for the next 18 months; one of a severe down-turn vs. moderate inflation. https://www.themoscowtimes.com/2021/09/03/world-economy-could-face-2008-meltdown-russias-central-bank-warns-a74962

Interbank. Brazil. Digital real. The Central Bank of Brazil is still studying the creation of a Digital Real, according to statements given by Fabio Araujo, a representative of the institution. https://news.bitcoin.com/central-bank-of-brazil-researches-creation-of-digital-real/

Interbank. Dollar Index. As of 10:33 pm EST, the Yahoo Market Watch Dollar Index was at 92.16. https://www.marketwatch.com/investing/index/dxy/charts?mod=mw_quote_tab

Central bank decisions as of 5 September 2021, 11:25 pm EST

AUD/USD 0.7437

As of 11:01 pm EST, no Reserve Bank of Australia decisions impacting rates.

NZD/USD 0.7137

As of 11:13 pm EST, no Reserve Bank of New Zealand decisions impacting rates.

USD/JPY 109.8100

As of 11:20 pm EST, no Bank of Japan decisions impacting rates.

USD/CNY

As of 11:24 pm EST, no People’s Bank of China decisions impacting rates.

For a consultation on any regulatory or legislative discussions or announcements, please reach out to us at altondrew@altondrew.com for information on consultation rates and to reserve an appointment.

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Alton Drew