Foreign exchange rates of interest …

USD-DXY=96.30

The US dollar index strengthened today versus its 2 January 2022 reading. On 4 January 2022, the USD-DXY was at 96.30, up from a reading of 95.73 on 2 January 2022.

USD-MXN=20.5131

The Mexican peso continued its strengthening against the US dollar. On 4 January 2022, the USD-MXN registered at 20.5131, down from the 2 January 2022 level of 20.7538.

USD-INR=74.2541

And like the peso, the Indian rupee also showed some strength over the prior two-day period. The USD-INR printed at 74.2541, down from the 2 January 2022 level of 75.5300.

USD-VND=22,830.2

The Vietnamese dong appeared flat over the 2-day period coming in today at USD-VND=22,830.2 versus the 2 January 2022 exchange rate of 22,838.

USD-NGN=410.627

Finally, Nigeria does not want to be left out of the strengthening game. Today the USD-NGN came in at 410.627, down from 411.450 on 2 January 2022.

Source: OANDA

Alton Drew

4.01.2022

Call to action: To support this page, please visit our advertisers.

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.

Chipping away at government’s currency monopoly status … and MMT does not help.

Modern monetary theory appears to convey on money the characteristics of a utility.  Under MMT, as monopoly issuers of money, governments and central banks can print as much money as they want without considering the implications from deficits or inflation, and if inflation is a concern, it can be offset with increases in taxes.

An unregulated, natural monopoly can get away with manipulating the supply of its product by freely changing the price for its output.  It can reduce the price of its output when it observes a competitive threat in the form of a new firm attempting to enter the utility’s market and when the new entrant is vanquished, it can then raise its prices to take advantage of customers captured in the emboldened single-provider market.

Bank trading desks input central bank overnight rates and discount window rates into their exchange rates for reselling currency and while they expend resources forecasting a central bank’s next policy rate move, they are apparently beholden to central bank decisions over which they have little to no say.

I can imagine that indirectly bank trading desks via their local reserve banks convey messages to the Federal Reserve that the current state of the economy may call for rates to move in a particular direction.  How much influence they may have I cannot provide any definitive answers to that question.

If anything, it does not appear that modern monetary theory is concerned about introducing a competitive component into the money monopoly held by the government and the central bank.  MMT is in part a tactic for buying votes from the electorate.  The more money that can be printed, the more goodies that government can purchase in order to sway votes to a particular party.  But going back to its utility component, the question how can we make the monopoly market on money more competitive could be raised.

For example, if cryptocurrency proponents were really serious about crypto being a technology that facilitates banking for the underserved, there would be as intense an effort to build an underlying political economy that networks the agricultural, transportation, electric/water/gas utilities, and service sectors such that there is significant use of crypto to buy and sell services. 

While this network is being established, crypto proponents should also work diligently on protecting the interchangeability of crypto with the current legal tender in order to maintain compliance with the tax payment requirements of the government.  While the federal government may be the sole collector of national taxes, the primary aim of crypto proponents should be to provide a viable alternative to the federal government as a national currency issuer.  

What could a viable alternative currency issuer look like? They could look like Archer Midland Daniels, Delta Air Lines, or Amazon.  They would be individual large suppliers of platforms that are already used to exchange goods, services, or ideas.  These individual platforms could interconnect in order to increase the value of their offerings and the currency (tokens) that ride on top of their platforms.  Their major issue would be to coordinate with government regarding a legal framework that allows for one-to-one interchangeability of their “currency” with that of the federal government.  

 Alton Drew

29.11.2021

Call to action: To support this page, please visit our advertisers.

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.

Contracting out the circulation of the U.S. political economy’s currency … and the never-ending threat of intervention

Article I, Section 8 of the United States Constitution describes Congress’ duty to regulate money.  Specifically, Congress has the duty to:

“Coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures…”

While the government has maintained the responsibility of minting coin and cash, the regulation of its value as well as that of foreign coin, is left up to the markets.  I am curious, though, as to how the law defines, “money”, “coin”, and “currency.”

A quick and dirty Black’s Law Dictionary definition of “currency’ is coined money and such banknotes or other paper money as are authorized by law and circulates as a medium of exchange.  31 CFR § 1010.100 defines currency as:

“The coin and paper money of the United States or of any other country that is designated as legal tender and that circulates and is customarily used and accepted as a medium of exchange in the country of issuance. Currency includes U.S. silver certificates, U.S. notes and Federal Reserve notes. Currency also includes official foreign bank notes that are customarily used and accepted as a medium of exchange in a foreign country.”

In the United States, the US Treasury and the Federal Reserve System source the currency.  They are the “farmers’ of the commodity we call currency.  According to Federal Reserve data, as of October 2021, there is approximately $2202.9 billion of currency in circulation.  When you factor in currency held in reserve at the Federal Reserve, the total monetary base of the United States as of October 2021 is approximately $6331 billion. 

The banks that the Treasury and the Federal Reserve charter and regulate participate in the interbank market, the market in which foreign exchange rates for currency is set.  I like to think of these banks as the wholesale/retail enterprises that are responsible for circulating currency, transmitting the value of the US political economy globally.  While I believe the US government could technically set these rates itself, the capitalist economic policy implemented by the US government prefers private institutions carry out this mission.

I would think that wholesale (bank) and retail traders and brokers prefer this model because they determine the share of income (profit) garnered via foreign exchange.  Because the Treasury and the Federal Reserve are the “farmers” of the currency and are primarily held responsible by the Congress for the day-to-day valuation of the currency, traders and brokers should stay mindful that the cloud of potential government intervention in the market always looms.

Keeping the dark cloud of potential intervention into the foreign exchange market dispersed can only occur via constant monitoring and initiatives to keep government at bay.  That is the trader and broker’s daily call to action.

Alton Drew

24.11.2021  

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

A quick thesis statement on trade and currency …

Man engages for the sole purpose of exchanging value. The carry trade is the movement of value from a place of low returns to a place of higher returns. A payment system is the conduit for extracting value where that value is captured in a currency. Labor and capital are the forces that combine to extract value. An optimal exchange of value is a function of a transparent, quick, efficient payment system, untaxed, with no leakage. Public policy should be in line with this philosophy of a payment system.

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: The fallacy of free markets

1 September 2021

It is in the best interest of governments and their central bank underwriters that government maintains some control over the market price for currencies.  As a reflection of the underlying value of a political economy, currency prices signal a country’s capacity to entertain investment.  Stable currency prices transmit a message that the underlying economy operates in an environment of legal, social, and regulatory certainty.  Whereas financial markets enjoy the profits and arbitrage opportunities that volatility may bring, governments and their central bank underwriters prefer a law-and-order environment for trade.  Certainty of domestic and foreign investment along with tax and customs collection is the higher priority for government.

There is a lot of noise that, in my opinion, blocks out these basic tenets of political economy.  It is no wonder that chartists or technical analysts focus primarily on pip movements on their bar graphs.  Pontification on future government moves can cause hair to be pulled out and put a trader into a state of mental numbness.  The trader cannot, however, take her eyes off of the policy ball for it is the policy maker, in this case the Federal Reserve, that provides the nutrients for currency growth and circulation.  It is their narrative that drives prices.  It is their decisions on reserve requirements, asset purchases, and fed fund and discount window rates that signal to their currency vendors, the banks, the varying rates that currency is sold to the public.

And thus, this is part of the fallacy; that banks are somehow free market players charging a market-driven interest rate for loans.  On the contrary.  Banks are more like government chartered (commissioned) privateers who sell currency to the public either via loans or directly over the counter during foreign exchange transactions.  Banks are merely doing the bidding of a government that needs its currency to flow to activities that eventually generate taxable events.  Banks provide government with a low-cost information search alternative for seeking out and financing high-yielding taxable events.

The trader should maintain focus on policy narratives and decisions that will impact the price of the dollar, currently the world’s most prevalent reserve currency.  Central banks are consuming economic, political, and these days more social data and inputting this information into their narrative.  The narrative creates the marching orders for their chief currency vendors, the banks.  There is no free market when your marching orders come from the central bank.  The free market is a fallacy that serves only to create a lot of noise from amongst the chattering classes.

Alton Drew

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.

Interbank Market News Scan: The increase in US currency in circulation is correlated with a decrease in US dollar value

29 August 2021

Data from the Federal Reserve shows that between July 2020 and July 2021 the amount of currency in circulation increased approximately 10% from $1,981.7 billion in July 2020 to $2,186.4 billion in July 2021.

Data from the MarketWatch dollar index showed that over the period July 2020 to July 2021, the value of the dollar decreased by 1.26%.

DateCurrency in circulation (in billions)MarketWatch Dollar Index
July 2020$1,981.793.35
August 2020$2,007.692.14
September 2020$2,027.593.89
October 2020$2,040.594.04
November 2020$2058.391.87
December 2020$2071.689.93
January 2021$2094.290.58
February 2021$2100.990.88
March 2021$2117.893.23
April 2021$2154.991.28
May 2021$2169.590.03
June 2021$2179.192.44
July 2021$2186.492.17

Sources: Board of Governors of the Federal Reserve, MarketWatch Dollar Index

In theory, American demand for imports, American investments in foreign countries, and speculation adds to the supply of American dollars.  Government intervention can also add to the supply of US dollars.  Expected tapering of US Treasury bills and agency mortgage-backed securities is expected to start later this year and this activity may result in a reduction of US dollars in circulation as the Fed sells off these securities.  The scarcity in dollars should see a future increase in dollar index value as well as an increase in interest rates.

The Federal Reserve tills the currency soil while the banks distribute the currency fruit.  If dollars are distributed by banks via loans at higher interest rates, tax generating activities via business and commerce may slow down.  The narrative behind the American currency, that American capitalism is the appropriate policy for generating and distributing wealth, will be tainted where capital becomes too expensive for businesses to access.

From the fiscal side, President Biden’s $3.5 trillion dollar infrastructure could suck more air out of the room putting upward pressure on rates and making more capital inaccessible by businesses.  Upward pressure on interest rates will only compound the fears that current inflationary trends will become more stationary than transitory.

Alton Drew

  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.

Interstate Market News Scan: Moving to digital currencies benefit you if it reduces your tax on living …

Suppose your monthly cost for accessing the infrastructure of a political economy came up to $20?  Suppose you looked at nation-states more like trading posts versus some object of irrational affection to which you pledge love and devotion?  Shouldn’t a practical approach to living in a political economy involve a resident generating a higher return on their physical and intellectual efforts to make a living where that tax for living is severely reduced?

In some ways, nations compete in this manner.  While they may not want to dilute their populations and cultures with outsiders, they want to attract investment into their jurisdictions.  Lower taxes, a reliable legal framework, a stable political environment, and minimal roadblocks to getting capital out of a country help bolster the demand for a nation’s currency.  Given the US dollar’s world reserve status, you can argue that the US scores the highest, on average, on these factors.

There are cracks in the demand for the US dollar that currency merchants should remain mindful of.  America has been experiencing real wage stagnation for over four decades.  Masking that long term trend is the immediate concern that inflation may be getting out of control as the U.S. and the rest of the globe claw out of the pandemic.  But Covid-19 may have sped up the long-expected elimination of certain jobs and has raised the discussion about how the American political economy will adjust to this major shift.

Currency merchants should incorporate these shifts into the valuation of currencies as they continue to make markets.  Currency merchants should not take their eyes off of the growing importance of digital currencies going forward into a Covid-endemic world.  This Covid environment will spawn more value creation from residences and other remote locations.  I will not be surprised to see in the next twenty years a world where more material and goods production happens overseas and payments for that production is made via digital currencies.  A processing plant in Ghana, for example, can be seen accepting Amazon, Google, or Delta Air digital tokens in exchange for product.  Given the networks these commercial entities represent or manage, their tokens could be re-exchanged as payment by the processing plants for other goods and services or exchanged with their local banks for cedi.

Not too far-fetched is the idea that an individual or a business could move their entire commercial enterprise into an Amazon network; an Amazon political economy.  If you can rent a residence using Amazon coin; purchase energy using an Amazon coin; buy food using Amazon coin; and pay a monthly “tax” at a fraction of what you would pay a legacy nation-state, wouldn’t you?

Alton Drew

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.

Prices

Exchange rates of interest as of 6:44 pm EST

Currency pairExchange rate
AUD/USD*0.7334
EUR/USD*1.1866
GBP/USD*1.3895
USD/CAD*1.2473
USD/CHF*0.9054
USD/JPY*109.6700
USD/MXN*19.8540
USD/BTC+0.0000
USD/ETH+0.0004
Sources: *Reuters +OANDA

Rates reported by the Federal Reserve (Release Date 29 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%

Banks as currency agents …

Banks should think of themselves as the private sector currency agents of the State.  The currency encapsulates the economic, commercial, and social value of a political economy.  A State-issued currency ties the State’s citizens to a particular value system while providing a mechanism that accounts for a citizen’s wealth and serves the citizen as a medium of exchange for goods and services, including the payment of taxes to the State.

Banks help distribute State-issued currency primarily through the creation of credit.  Banks are a “port of call” for currency; receiving deposits from its customers, capital from its investors, and placing State-issued Treasurys, underwritten by the central bank, into its investment portfolio.  Banks issue loans to their customers creating money in the process.  This money can be deposited at other banks or used by consumers or businesses for purchases.  The fees for financial services provided to consumers and the interest earned from lending to end users and producers provide the banks with income that, along with the income generated by businesses financed by banks, can be taxed by the State.

The fallout from the 2007-2008 financial meltdown has created a narrative that banks are entities separate from the State; private sector “bad boys” whose reckless behavior from creating financial instruments doomed to perform poorly caused people to lose jobs and credit to freeze.  The narrative had citizens questioning why these misbehaving banks received bailouts from the U.S. government while ordinary citizens had to bear the brunt of the rippling effects throughout the economy. 

The answer is simple.  Selling debt instruments and earning fees for placing these instruments into the hands of investors part of the implicit agreement between the State and the banks as currency agents.  Even as elected officials such as Senator Elizabeth Warren, Democrat of Massachusetts and Senator Bernie Sanders, Independent of Vermont, argue for increased regulation of America’s larger banks, the truth of the matter is that dismantling the mechanisms of banking would be too costly to the State’s currency distribution system.  The State would have to re-write its laws to support an alternative system and for all the noise against the current system, seems to be in no rush to replace it.