Will the Fed decrease the supply of currency for trade?

A review of the minutes from the Federal Open Market Committee meeting last month left me with the impression that the Federal Reserve will be ready to raise its overnight rate on interbank loans (the fed funds rate) in June of this year versus waiting until 2023. Board members and other FOMC participants see a strong economic outlook for the US along with higher inflation and tighter labor markets. While the “taper” word has for the most part gone the way of the other t-word, “transitory”, both concepts are still integral to Federal Reserve monetary policy over the next year.

By the middle of this month, the Federal Reserve is expected to purchase $40 billion of Treasury securities and $20 billion of agency mortgage-backed securities in part to maintain a smooth transition to a run-off of its balance sheet. The FOMC made clear in its minutes that the fed funds rate was still its primary monetary policy tool for achieving full employment and stable prices. The fed funds rate provides the Federal Reserve with more outcome certainty as opposed to additions to or subtraction from its balance sheet.

The FOMC also noted that during the period between its last two meetings, there were no attempts at intervening in the foreign currency markets as part of any dollar-support policy.

Touching on currency supply for a minute, the fourth quarter of 2021 saw the supply of US currency in circulation increase by 1.48% while the dollar index increased by 1.97%. I raise this merely as an interesting point given that an increase of currency in this instance may have been accompanied by a greater increase in demand by foreign and domestic customers.

In my opinion, there should be no surprise about a decrease in currency supply over the next twelve months. The fed funds rate will increase likely along with an increase in the amount of cash member banks are required to keep on reserve with the Fed. Less money in the system will lead to increases in interest rates. Increases may likely lead to increased yields making US bonds attractive.

People interested in retail forex trade should be mindful of brokers not on the up and up. Volatility and the size of the retail market is like blood in the water for less than scrupulous brokers selling you a pipe dream. Make the new year a great one.

Alton Drew

6.01.2022

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Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

Interbank Market News Scan: The world waits for the Fed’s decision on tapering …

Interbank, China. The following are the parity rates for the Chinese renminbi. https://www.bignewsnetwork.com/news/271640484/market-exchange-rates-in-china—-nov-3

Interbank, India. The rupee appreciated by 22 paise to close at 74.46 (provisional) against the US dollar on Wednesday on the back of easing crude oil prices and foreign fund flows into domestic IPOs. https://www.business-standard.com/article/markets/rupee-appreciates-22-paise-to-close-at-74-46-against-the-us-dollar-121110301094_1.html

Interbank, foreign currencies, Afghanistan. Taliban bans foreign currencies in Afghanistan. https://www.bbc.com/news/business-59129470

Interbank, central bank digital currencies. A network among multiple central bank digital currencies could create efficiencies in the tens of billions of dollars and benefit all participants, according to a new report. https://www.bloomberg.com/news/articles/2021-11-03/what-a-global-central-bank-digital-currency-network-might-do?sref=oriheOus

Interbank. There is a disconnect between exchange rates and the classical variables that explain them. https://insight.kellogg.northwestern.edu/article/why-currency-exchange-rates-fluctuate

My Morning Takeaway: The trader should seek out best information sources on the future …

The Bloomberg article I note above has me thinking about how currency trade will look in the near future.  I am not surprised about the discussions being held regarding how a central bank digital currency will be distributed globally.  If efficiencies are created by a network of central bank digital currencies, especially where banks can save on settlement costs, then the trader, in my opinion, should get as much insight into the degree of volatility spawned by an increasingly efficient network.

If we assume efficiency involves an increase in data that can be analyzed at a faster rate, then a broker should be able to convey this information to a trader using her broker network.  Again, the ability of a broker to provide this type of information thus giving the trader insights on how volatility may impact price movements will prove invaluable to both the trader and broker.

Another side-note thought on the future: the role of the bank in a central bank digital currency future.  I don’t see the banks being cut out of the payment system per se.  The banks’ strategic and tactical position in the payments system makes them too valuable for central banks to kick to the curb.  Credit creates money and the banks will continue their role as the retail distributors of the currency whether that currency is a central bank distributed coin or not.

Alton Drew 3.11.2021

National Futures Association announcements of interest …

For Immediate Release
April 28, 2021

For more information contact:

Christie Hillsman, 312-781-1490, chillsman@nfa.futures.org
Karen Wuertz, 312-781-1335, kwuertz@nfa.futures.org

NFA orders former associated person Jeremy Ruth never to reapply for NFA membership

April 28, Chicago—NFA has ordered Jeremy Ruth, a former associated person of Postrock Brokerage LLC (Postrock), never to reapply for NFA membership status in any capacity or act as a principal of an NFA Member. Postrock is a former NFA Member introducing broker located in Chicago, Illinois.

The Decision, issued by an NFA Hearing Panel, is based on a Complaint issued by NFA’s Business Conduct Committee and a settlement offer submitted by Ruth, in which he neither admitted nor denied the allegations. The Complaint alleges that he failed to disclose the impact of commissions on customers’ profit potential and placed trades for customers which offered no economic benefit to them and only generated additional commissions. The Complaint also alleges that Ruth made misleading statements to customers and failed to disclose that all of Ruth’s other customers had lost money. Finally, the Complaint alleges that Ruth made unauthorized trades for customers or exercised discretion over customer accounts without obtaining written authority.

For more information, read the Complaint and Decision.

Source: National Futures Association

Interbank market news scan: Major G-10 currencies split on growth with Swiss, Norwegian, and Swedish currencies depreciating…

The Swiss franc, Norwegian krone, and Swedish kroner ended this week depreciating the most against the US dollar. More later today as to the political, economic, central bank, and commodity price information that not only impacted the market but that brokers should be sharing to help maintain fairness and integrity in the foreign exchange market.

Currency pair22 March 202125 March 2021Percentage change
EUR/USD1.19131.1798-.96
AUD/USD0.77340.7592-1.84
GBP/USD1.38511.3712-1.00
USD/JPY108.765109.0580.27
NZD/USD0.71610.6966-2.7
USD/CHF0.92620.93721.19
USD/NOK8.52218.61381.08
USD/SEK8.53018.62931.16
USD/CAD1.25091.25880.63
Source: OANDA