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 ECB philosophy behind a central bank digital currency …

Interbank, European Central Bank. Fabio Panetta, member of the executive board of the European Central Bank, presented on the feasibility and deployment of a central bank digital currency.  The main goal of a central bank digital currency, according to the presentation, should be to maintain “public access and full usability of central bank money in a world where consumers and firms are turning increasingly toward electronic payments.”

Of interest to foreign exchange traders in regards to a central bank digital currency is the central bank’s concern about maintaining the convertibility of private money to central bank cash, future cross-border, cross-currency possibilities including making cross-border payments easier.

Since central bank digital currencies are still in the nascent stage, especially in the United States, the concerns and possibilities are still a way off but should be on the minds of currency traders.

Traders should contact their brokers for more information on how foreign exchange rates may react to events described in the above blog post.

Interbank, Federal Reserve. Federal Reserve System governor Michelle Bowman warned of housing market generated inflation yesterday during remarks before a Women in Housing and Finance public policy luncheon.  Governor Bowman noted significant increases in home prices since 2020 as well as increased prices in the rental markets.

Foreign exchange traders should take note of the temporal nature of inflation overall.  Governor Bowman notes that shortages in labor, land lots, and materials have been fueling housing supply and likely supporting the higher prices being seen in the markets.  Because housing is a large component of the American economy, higher housing prices are fueling inflationary pressures.  But while Governor Boman did not use the term “transitory”, her remarks did introduce at least two factors that may limit the duration of higher prices: the aforementioned supply issues and the expiration of forbearance on mortgage payments.  Traders should be aware that as supply constraint on labor and material evaporate, increases in housing supply may drive down prices in the longer run.  Also, the expiration of forbearance and other stimulative measures may result in lower housing prices as well.

Traders should contact their brokers for more information on how foreign exchange rates may react to events described in the above blog post.

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.

Alton Drew

9.11.2021

Interbank Market News Scan: Will today’s U.S. jobs situation report provide traders with insights on the economy’s growth?

Interbank, People’s Bank of China.  Today, the People’s Bank of China (PBOC) announced open market operations in the form of reverse repo operations totaling RMB 100 billion at a rate of 2.20% with a maturity of seven days. 

A reverse repurchase agreement or repo is the purchase of securities with the agreement to sell them back at a higher price at a specific future date.  For the party selling the security and agreeing to repurchase the security at some time in the future (in this case seven days), it is a repurchase agreement.  For the party buying the securities, it is a reverse repurchase agreement.

What foreign exchange traders may find interesting is the difference between the PBOC’s pledged repo rate of 2.1238% and the 2.20% rate on the RRP.  Inflation is the buzz word from central banks around the world.  Should China be considered an exception? And while China’s economy is still experiencing positive growth, rate of growth has been decreasing.

The PBOC currently reports an exchange rate of USD-CNY=6.3980.

Traders should contact their brokers for more information on how the PBOC’s open market operations via reverse repurchase agreements may move foreign exchange rates.  

Interbank, Federal Reserve, Jobs Report.  Today, the Board of Governors of the Federal Reserve System (Federal Reserve) will be keeping a keen eye on the U.S. Department of Labor’s Jobs Situation Report. The Federal Reserve has made clear that it will maintain its fed funds policy target rate at 0 to .25% until it sees labor market conditions consistent with maximum employment.

In theory, maximum or full employment is a condition where an economy is making optimal use of its skilled and unskilled labor.  There is no magic unemployment rate number that indicates a voila moment on maximum employment.  

The unemployment rate, which currently stands at 4.8%, tends to get a lot of play in the business media.  Traders should bear in mind that the unemployment rate is a lagging indicator with not much bearing on the future performance of the U.S. economy.  While a lagging indicator itself, data describing trends in productivity and the costs of acquiring employees along with changes in producer and consumer price indices are more important especially in a post-pandemic era where changes in the structure of the labor force have accelerated.

Traders should contact their brokers for more information on how foreign exchange rates may react to today’s Jobs Situation Report.

Alton Drew

5.11.2021

 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: Bank of England to announce interest rate targets today

Interbank, central bank, Bank of England. At 12 pm GMT (8:00 am EST), the Bank of England (BOE) releases its monetary policy report today including its target interest rates.  The current bank rate is set at 0.1%.  The bank rate determines the interest rates the BOE pays to commercial banks which in turn impacts rates paid by commercial bank borrowing customers.  This rate is important to traders because it provides valuable information that can be used to determine changes in inflation and yields on government bonds which in turn provides the trader with insights as to where foreign exchange rates will move.  

The BOE’s current inflation target is 2.0%, but actual inflation is running at 3.1%.  Since November 2009, the BOE has purchased £895 million in corporate and government bonds as part of its quantitative easing program.  QE is intended to help lower interest rates and stimulate growth in the British economy.

Traders should contact their brokers for more information on how BOE’s interest rates decision may move foreign exchange rates.

Interbank, central bank, Federal Reserve.  Yesterday, the Board of Governors of the Federal Reserve System announced that its federal fund and discount window rate target would remain between 0-.25%. In addition, the Federal Reserve will begin to reduce later this month its monthly purchases of US Treasury bonds and agency mortgage-backed securities.  It will reduce its monthly purchase of US Treasurys from $80 billion to $70 billion.  It will reduce its monthly agency mortgage-backed securities from $40 billion to $35 billion.

The Federal Reserve asset purchases were designed primarily to keep interest rates and stimulate the economy during the COVID pandemic.  As more Americans are vaccinated and the negative impact of the supply chain congestion wanes, the Federal Reserve is seeing more reasons to trim its asset purchases.

The Federal Reserve has made it clear that the decision to taper asset purchases and the decision to raise the federal funds rate are separate issues.  If, however, the taper policy was implemented to stimulate the economy by keeping interest rates low, traders should expect upward movement in interest rates as a result.  Increased interest rates may have an impact on the direction of foreign exchange rates regardless of a Federal Reserve decision to increase the fed funds rate.

Traders should contact their brokers for more information on how the Federal Reserve’s fed funds rate and tapering decisions may move foreign exchange rates.

Alton Drew

4.11.2021

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: 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  

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.

Interbank Market News Scan: Dollar, yuan see similar price increases in terms of Asian currencies. Euro has to play catch up.

25 August 2021

As US Vice-President Kamala Harris wraps up her Asia tour this week, I was curious to see how currency prices have moved since the Biden-Harris administration took office on 20 January 2021.  I see a battle for currency preference between the United States, the Eurozone, and China and so far, seven months into the Biden-Harris administration, the Eurozone is being left behind.

Where the dollar, the yuan, and the euro are priced in terms of the ringgit, Indian rupee, and the yen, the yuan has seen the greatest price increase since 20 January 2021.  For example, during the period 20 January 2021 to 25 August 2021, USD/JPY increased 6%; USD/MYR increased 4%, and the USD/INR increased 1.8% for an average of 3.93%.

During the same period, the CNY/JPY increased 6%; CNY/MYR increased 14%; and the CNY/INR increased 1.6% for an average of 7.2%.

Meanwhile, the euro got the least love with EUR/JPY increasing 2.9%; EUR/MYR relatively flat at 0.008%; and EUR/INR decreasing by 1.29%.  Using this bucket of Asian currencies, average euro increase is around .54%

In the immediate run, I don’t see dollar or euro prices in terms of the ringgit, yen, or Indian rupee increasing especially if Asian economies are somehow able to increase their respective economies productive capacities and increase trade with each other, taking advantage of their resource-rich environments.  The Harris-Biden administration’s fall in polling numbers as a result of perceived mismanagement of American withdrawal from Afghanistan and less than stellar campaign to get more of the American population vaccinated may likely weigh on the effectiveness of Ms Harris’ attempt to garner strategic trading partners in the region.  

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.

 Foreign exchange rates of interest as of 10:20 am EST

Currency PairFederal ReserveReuters
AUS/USD0.71330.7254
USD/BRL5.39905.2419
USD/CAD1.28531.2623
USD/CNY6.50126.4771
USD/DKK6.36126.3337
EUR/USD1.16901.1739
USD/HKD7.78977.7840
USD/INR74.350074.2250
USD/JPY109.7700109.9300
NZD/USD0.68300.6949
USD/MYR4.23854.2020
Sources: Federal Reserve, Reuters