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

Interbank Market News Scan: Waiting for Jackson Hole while Kamala Harris attempts to keep the US out of a global trading hole.

24 August 2021

The Jackson Hole Economic Policy Symposium, hosted by the Federal Reserve Bank of Kansas City, is set to begin on 26 August 2021 with oral and written presentations focused on macroeconomic policy in an uneven economy.  Federal Reserve Board chairman Jerome Powell will make a presentation on 27 August.

Since the Federal Reserve released its minutes of the 27-28 July Federal Open Market Committee meeting, the biggest buzz has been speculation s to when the Federal Reserve would begin easing back on its $120 billion per month purchases of agency mortgage-backed securities and U.S. Treasury securities.  These purchases have been instrumental in keeping interest rates low during the Covid-19 pandemic with the intent of spurring business spending and investment, sustaining consumer demand, and maintaining certainty in the financial markets.

The minutes from the FOMC meeting has hinted at a possibility of Fed asset purchases tapering off as early as the end of this year and upward pressure on interest rates, especially in the longer-term range, is expected.

Meanwhile, U.S. Vice-President Kamala Harris today heads to Vietnam as part of the second leg of a four-day tour of Asia.  Ms Harris’ primary mission appears to include not only the building of relationships with certain Asian countries, but to let Asian countries know that they have an economic partner alternative to China.

China’s Belt and Road Initiative throughout Asia as well as its claims on the South China Sea through which trillions in dollars of commercial trade passes through poses an economic threat to the United States.  Unless the US can pose itself as a reliable economic trading partner to Malaysia, Vietnam, Singapore, and Taiwan, amongst other nations, then the United States may be locked out of the Asian markets or forced to buy and sell goods and services in the region on onerous terms.

Ms Harris has been making the argument that China’s efforts in the South China Sea are illegal under international law.

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 9:00 am EST

Currency PairFederal ReserveReutersOANDA
AUS/USD0.71330.72430.7184
USD/BRL5.39905.37895.3793
USD/CAD1.28531.26181.2718
USD/CNY6.50126.47726.4833
USD/DKK6.36126.33596.3399
EUR/USD1.16901.17351.1728
USD/HKD7.78977.78787.7912
USD/INR74.190074.194074.0634
USD/JPY109.7700109.6700109.8400
NZD/USD0.68300.69490.6867
USD/MYR4.23854.21704.2265
Source: Federal Reserve, Reuters, OANDA

Toward Public Policy Support for High-value Trade

21 August 2021

I prefer a society that is biased toward trader/merchants; where one lives on the spread and retains the majority of her earnings.  Wage earning is a fancy term for slavery where many in the labor market are subjugated to selling a precious commodity over which they have illusionary control: time.

The irony is that what one earns for their time is inversely related to the wealth of knowledge they have amassed over time.  Unfortunately for the wage earner, the valuation of their labor is made not by the ultimate end user of their product but by the middle man corporation that employs them.  Rather than selling time to the corporation, time should be another input that labor uses to create and sell their product.

Today’s technology makes such a self-ownership approach increasingly feasible depending on the wage earner’s vocation.  Some of us can transition from wage earner to merchant due to digitalization and that sector of the information/knowledge/problem solving industry that we sit in.  So used are we to selling time that we must now start to think of the utilities, database subscriptions, and equipment costs incurred in producing an information product and sell that product at a sufficient margin; to live via the “carry trade.”

The trader wants a profitable balance sheet, one where she has a healthy surplus.  Bankers that provide liquidity to traders also want traders to enjoy a profitable balance sheet because it assures repayment of leverage.

But bankers also want to fund activities generating high returns and I think to ensure that traders are disciplined enough to seek out information on high return activity, banks will want to assess higher interest rates and other margin requirements in order to weed out low-return low value activity.  The Federal Reserve could encourage high-value search behavior by increasing the fed funds and discount window rates.  The Federal Reserve could also start driving up rates by unwinding its monthly purchases of $120 billion in US Treasury and agency-backed mortgage securities.

Higher rates will encourage living on the spread and the seeking of higher returns.

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 Fed speak not providing much to shift foreign exchange markets …

A Bloomberg interview with Federal Reserve Bank of Dallas president Robert Kaplan along with remarks by Federal Reserve Board vice-chair Richard Clarida and Federal Reserve Bank of Atlanta president Raphael Bostick did not provide much information to attribute to any shifts in the foreign exchange markets. 

In a 9 August 2021 interview with Bloomberg, Mr Kaplan expressed confidence about where the fed funds rate, the overnight rate for loans between Fed member banks, stood.  The current target range of the fed funds rate is between 0 and .25%. 

Mr Kaplan expressed caution that the fed funds rate and the effects of asset purchases by the Federal Reserve be looked at separately.  Currently the Federal Reserve is purchasing $120 billion a month of US Treasury securities and agency-backed securities as part of a strategy to keep liquidity in the credit markets while keeping borrowing rates low.  The Federal Reserve’s monetary policy is designed to add fuel to U.S. economic growth by making lower cost credit available to businesses.    

In remarks made the following day, Federal Reserve vice-chair Clarida noted that the U.S. was out of the recession precipitated by government lock down of the economy in March 2020.  He expects the economy to continue its expansion through next year while cautioning that growth will be tempered by a variant of the coronavirus responsible for the Covid-19 pandemic.  Vice-chairman Clarida does see unemployment continuing to fall through 2023 along with inflation which he forecasts to be around 2.2% in 2022 and 2023.

The Federal Reserve is today following a flexible rate policy that will allow the economy to run periodically over its inflation target of 2%.  Dallas Fed president Kaplan did note that businesses are expecting to raise prices, in line with Federal Reserve forecasts on inflation.  Mr Kaplan also noted that there was an active debate regarding when the Federal Reserve would start cutting back on its monthly $120 billion a month asset purchases. Mr Kaplan also believes that adjusting asset purchases now would put less pressure on the fed funds rate.

As Federal Reserve Bank of Atlanta president Bostick shared today, the two percent inflation target number is thought by the Federal Reserve to be the appropriate numerical goal to mitigate the risks of deflation.  The rate, as a pre-condition to a healthy economy, is seen as appropriate in assisting households protect themselves from any changes in purchasing power.

The takeaway for traders is that sluggish growth in the US in 2022 and 2023 may result in tempered appreciation of the dollar’s value in those years.  So far, the Federal Reserve is seeing little change in relative income or price changes.  Nor does the Federal Reserve seem to signaling much in relative interest changes, at least in the short to intermediate term.  

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: How close is Facebook to becoming a digital nation-state?

The Takeaway: Brokers and traders should pay close attention to how Facebook addresses regulation of Diem

Yesterday I shared some insights about Amazon’s potential for building a digital nation based on the creation of its own digital token.  The company signaled efforts in this area by announcing a search for staff with experience in creating digital currency.  Writing about their efforts naturally led me to thinking about the efforts of another large platform manager, Facebook.

Given over 2 billion subscribers to Facebook’s platform and millions of daily users, The Menlo Park, California-based company seems like another likely candidate for “digital nation” status.  Arguably it is ahead of Amazon in the creation of its own digital currency, the Diem.  But is it ahead of Amazon when it comes to putting in place the transactional environment necessary for a “digital country?”

Facebook’s purported mission, according to its annual report, is to “give people the power to build community and to bring the world closer together.”  Facebook generates almost all of its revenues from advertisement and while it considers Amazon a competitor in the advertisement space, Facebook has not invested in transportation, storage, or distribution systems for goods and services or subscriber content production.  In my opinion, these channels have boosted Amazon’s value as an issuer of digital coins because they represent the underpinnings of a transactional environment.  Transactions are the underpinnings of growth in output and income and while there are notices of items for sale in numerous Facebook groups and advertisement appearing on users’ profiles, Facebook is more of a personal data aggregator than it is a market for trade.

Lastly, what also works against Facebook is its history of data privacy breaches.  Both aisles of Congress have come down on Facebook for its lack of transparency in notifying its subscribers as to how the company uses consumer data.  These privacy concerns have also leaked into Congress’ assessment of how the company’s proposed digital currency would be incorporated into any potential data grabbing strategies.

I believe what is more important to Congress than its rhetoric about consumer protection and privacy is how a digital currency provided by a behemoth digital platform could challenge the United States’ ability as a tax and customs jurisdiction.  Should a significant number of miners, farmers, merchants, and other business entities start using Facebook’s digital currency to exchange among themselves and with Facebook’s end user subscribers, Facebook becomes a new nation-state.

Facebook hopes to have Diem launched by the end of 2021.  What impact the current variation in the corona virus and the ensuing Covid disease will have on deployment is unknown.  Right now, speculators and broker/dealers may not have Diem on their radar, but they should, like Amazon, prepare for a large platform issuing its currency and also determine how Diem should be valued.

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.

Rates reported by the Federal Reserve (Release Date 27 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: 0.06%

1-year Treasury bill: 0.08%

Prices

Exchange rates of interest as of 9:02 am EST

Currency pairExchange rate
AUD/USD*0.7381
EUR/USD*1.1802
GBP/USD*1.3826
USD/CAD*1.2543
USD/CHF*0.9162
USD/JPY*110.1800
USD/MXN*20.0290
USD/BTC+0.0000
USD/ETH+0.0005

Sources: *Reuters +OANDA

Interbank Market News Scan: Is Jeff Bezos on the way to building a digital country?

27 July 2021

Links to follow

However, what fewer people are aware of is the way that the app world has transformed the forex industry. Forex trading apps have proliferated in recent years, and it’s easy to see why: these apps offer a chance to keep up to date with the latest events in the market, and make the taking of real-time trading decisions possible. https://techbullion.com/how-foreign-exchange-apps-are-changing-the-trading-industry/

Speculations about Amazon set to accept Bitcoin as a form of payment by the end of the year have been growing, following a job posting for a “Digital Currency and Blockchain Product Lead.” Bitcoin Prices Surge Thanks to Amazon Rumors (yahoo.com)

El Salvador is the first country to declare bitcoin legal tender. But the experiment raises big questions about what will happen next — for bitcoin and the country itself. El Salvador made bitcoin a legal currency. Now it gets interesting (cnbc.com)

Six things that happened in crypto this past week. Crypto news: bitcoin rally, Amazon digital currency expert, tether probe (cnbc.com)

The Takeaway: Is Jeff Bezos on the way to building a digital country?

There is some buzz about possible acceptance by Amazon of bitcoin as digital payment for its goods and services.  The speculation is in part a result of Amazon’s recruitment of a digital currency and blockchain product lead.  However, Amazon’s global delivery platform combined with its own digital token could take Amazon to heights higher than its New Shepard rocket.  Futures commission merchants and retail foreign exchange dealers (brokerages and brokers) should envision such a digital token as a significant future foreign exchange trade.

How soon this trade comes about depends on how quickly Amazon can design, test, and deploy a token.  I believe enough of a platform necessary for supporting a digital token is already in place.  Let us start with an important consumer item: food. 

A digital country will need a food distribution system to sustain it.  Amazon’s purchase of Whole Foods in 2017 gave the company at the time of the acquisition a retail footprint and distribution network valued at $14 billion.  With its goal of being “the Earth’s most customer-centric company”, encouraging farmers and other food processing vendors to use its digital tender creates currency agents that can trade that valuable token with other commercial entities. 

In addition to food distribution, lying at the heart of the Amazon economy are the transactions conducted on its network.  Merchants of all stripes trade on Amazon’s network.  Amazon’s attempts at facilitating trade by creating an online space for vendors who would otherwise be frozen out of a traditional brick and mortar business due to costs are generating revenues for the company and enhancing its brand as merchant centric.  Like farmers and food processors, merchants who choose to use an Amazon token become currency merchants for the company by turning around and trading the tokens into consumer, other retailer, and wholesale markets.

Lastly, pushing up Amazon’s value further will be its data and information services game.  Amazon’s cloud services and its electronic devices such as Kindle and Alexa collect data and make that data available for sale.  Allowing consumers, governments, and commercial enterprises to purchase Amazon data products and output with its tender will only help increase a digital token’s value.

It is tempting to say that there is a way to go before Amazon comes up with a digital token of their own to rival bitcoin or other cryptocurrencies, but with technology, “long way off” is around the corner.

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.

— Alton Drew

Rates reported by the Federal Reserve (Release Date 26 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%

Prices

Exchange rates of interest as of 1:39 am EST

Currency pairExchange rate
AUD/USD*0.7381
EUR/USD*1.1802
GBP/USD*1.3826
USD/CAD*1.2543
USD/CHF*0.9162
USD/JPY*110.1800
USD/MXN*20.0290
Source: *Reuters

Interbank Market News Scan: Forex market dealers prepare for Fed monetary policy announcement ….

24 July 2021

Monetary Policy News

Markets prepare for Federal Reserve policy decision

The Board of Governors of the Federal Reserve System meet on 27 & 28 July 2021 for their policy meeting, with a press conference scheduled on 28 July after the 2:00pm release of its decision on the Federal Funds and Discount Window rates.  While the Federal Reserve does not directly regulate rates set in the interbank market, the fed funds and discount window rates set the environment for rate determination in the interbank markets.

While the Federal Reserve maintained its policy of board members not releasing any statements during the week leading up to its policy announcement, the equity markets have been signaling an expectation that the central bank will continue its policy of purchasing $120 billion a month in U.S. Treasurys and agency backed debt.  The past several weeks has seen increased discussions in Congress and the media about increasing prices for food, energy, automobiles, and other goods and services.  Traders and dealers will be paying close attention to any language that signals an increase in the costs for money and/or changes in the supply of money.

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.

Rates reported by the Federal Reserve (Release Date 23 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%

Prices

Exchange rates of interest as of 1:15 pm AST

Currency pairExchange rate
AUD/USD*0.7364
EUR/USD*1.1771
GBP/USD*1.3746
USD/CAD*1.2556
USD/CHF*0.9190
USD/JPY*110.5400
USD/XCD+2.7000
USD/NGN+411.1590
USD/MXN*20.0430
Sources: *Reuters +OANDA

Interbank Market News Scan: Assessing the Legal and Political “Meteorology” of Foreign Exchange

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.

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.

Exchange rates of interest as of 11:45 am AST

Currency pairExchange rate
AUD/USD*0.7352
EUR/USD*1.1794
GBP/USD*1.3714
USD/CAD*1.2739
USD/CHF*0.9192
USD/JPY*109.3100
USD/XCD+2.7000
USD/NGN+410.9850
USD/MXN*20.0353
Sources: *Reuters +OANDA

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%