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  

European Central Bank sees growth moderating in 2022

The Interbank

The European Central Bank today released its update on economic, financial, and monetary developments. The ECB sees growth moderating into 2022 primarily due to supply bottlenecks.  Global supplier delivery times remain high as food and energy upward price pressure remains in place.  These pressures reflect a rebound from the low-price environment spawned by the pandemic.

While the ECB credits higher vaccination rates for the support of increased consumer spending, higher energy prices may be offsetting the increase in spending.  Shortages of materials, equipment, and labor is holding back manufacturing.  And on the labor front, the number of people in the workforce and hours worked still remain under pre-pandemic levels.

EUR/USD is currently trading at $1.1468.

Traders interested in the full report should go to https://www.ecb.europa.eu/pub/economic-bulletin/html/eb202107.en.html.

The Bank of Mexico maintained its overnight target rate at 4.75%.  No written statements by the Bank have been released at the time of this writing.

MXN/USD is currently trading at $20.5698.

Regulatory News

No major regulatory events impacting traders or broker-dealers this morning.

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

Alton Drew

11.11.2021

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: 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: 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

Interbank Market News Scan: I bet on the AUD-USD last night…

Last night, I bet on an increase in the AUD-USD exchange rate after reading analysis that the currency pair was seeing resistance around 0.7500 USD with lows between .7440-.7480 USD. While inflation in Australia is lower than in the United States (3.8% vs 5.4%), what helped tip me to the buy side was the higher yield on Australian 10-year government bonds (1.76%) versus the United States 10-year (1.63%).

Bank rates in Australia are slightly lower which tells me that their banks have a little more incentive to lend, which they may need given an expected slow retraction in inflation with expectations at 3.1%.

Meanwhile in the United States, Treasury secretary Janet Yellen and Federal Reserve chair Jerome Powell expect inflation concerns to dissipate next year.

Personally, I suspect that if there is any inflation it will be in certain areas of the labor market. I believe businesses with any vision will put in place labor work arounds where they will not require people to come into offices. Professional, “creative” type employees will be able to demand higher salaries while low wage earners will drive down earnings as they compete with more low-wage, unskilled workers.

Back to Australia, again, expect the inflation print tonight. I will be listening to how other central banks react. The news may temper the level of rate hikes they put in place. Just a thought …

Alton Drew

26.10.2021

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

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.

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