Interbank Market News Scan: China tightens regulations on foreign exchange market….

5 September 2021

Interbank. Chinese officials to tighten foreign exchange market supervision. https://www.forexlive.com/centralbank/!/chinese-officials-to-tighten-foreign-exchange-market-supervision-20210905

Interbank. Nigeria. Naira. Former Deputy Governor of Central Bank of Nigeria(CBN), Dr Obadaiah Melafia weekend attributed the dip of the naira in the foreign exchange market to the bad policies of President Muhammadu Buhari’s administration and the tensions across the country. “Nigeria is a failed state.” https://www.vanguardngr.com/2021/09/dip-of-naira-in-foreign-exchange-market-due-to-buharis-bad-policies-mailafia-alleges/

Interbank. Forex. So what fundamentals are impacting the foreign exchange markets? https://finance.yahoo.com/news/introduction-major-fundamental-influences-forex-080046373.html

Interbank. India. India’s management of foreign exchange reserves results in supporting 18 months of imports. https://www.deccanherald.com/opinion/panorama/management-of-foreign-exchange-reserves-1026066.html

Interbank. Russia. Russia’s central bank provides alternative economic forecast for the next 18 months; one of a severe down-turn vs. moderate inflation. https://www.themoscowtimes.com/2021/09/03/world-economy-could-face-2008-meltdown-russias-central-bank-warns-a74962

Interbank. Brazil. Digital real. The Central Bank of Brazil is still studying the creation of a Digital Real, according to statements given by Fabio Araujo, a representative of the institution. https://news.bitcoin.com/central-bank-of-brazil-researches-creation-of-digital-real/

Interbank. Dollar Index. As of 10:33 pm EST, the Yahoo Market Watch Dollar Index was at 92.16. https://www.marketwatch.com/investing/index/dxy/charts?mod=mw_quote_tab

Central bank decisions as of 5 September 2021, 11:25 pm EST

AUD/USD 0.7437

As of 11:01 pm EST, no Reserve Bank of Australia decisions impacting rates.

NZD/USD 0.7137

As of 11:13 pm EST, no Reserve Bank of New Zealand decisions impacting rates.

USD/JPY 109.8100

As of 11:20 pm EST, no Bank of Japan decisions impacting rates.

USD/CNY

As of 11:24 pm EST, no People’s Bank of China decisions impacting rates.

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.

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Alton Drew

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: As Afghanistan transitions, currency traders should wait for dust to settle in light of China’s influence …

15 August 2021

Currency pairExchange rate10-year yield, government securities
AFN/CNY0.07982.88
AFN/USD0.012331.28
Source: OANDA

The transition of political power occurring in Afghanistan today should have traders and brokers asking about the currency trade opportunities under a Taliban-led Afghanistan.  The price of the Afghani has been falling in both US dollars and Chinese renminbi over the last 90 days.  I suspect as Afghanistan moves through its transition over the next 48 hours that western investors will wait for the dust to settle on where yields Afghani-denominated securities will fall out.

After two decades in Afghanistan, the lightening quick deterioration in the ability of the government to maintain control of its territory speaks negatively about the United States as a stabilizing force in the region.  That accolade right now may belong more in China’s court than the U.S.  China has stayed engaged with Afghanistan primarily due to three concerns.

First, the protection of small and medium sized Chinese enterprises in Afghanistan; second, to stop the training of Uygur supporting insurgents from an area of Afghanistan that lies along China’s western border; and third, to maintain a vital component of its Belt and Road Initiative, a policy of transportation and communications infrastructure that facilitates the transfer of resources to China.

China is Afghanistan’s largest investor, having provided Afghanistan with telecom equipment and other telecom infrastructure.  China extracts oil in the Amu Daya basin, and also mines lithium and copper, both essential to providing telecommunications equipment and facilities.

Geographically, Afghanistan provides China with the shortest route between China, the Middle East, the Persian Gulf, and the Arabian Sea, important for cost effective movement of trade.

And because China has shown no interest in “rebuilding Afghanistan”, including altering its political, social, or ideological institutions, it has been able to maintain a dialogue with the Taliban, important now more than ever as Afghanistan sees a change in leadership.

The takeaway:  Traders should monitor the developing government relationships and take note of relative changes in income, prices, commodity availability, and interest rates.

Alton Drew

Sources:

OANDA

China to ‘capitalise’ on West’s Taliban failure as US geopolitical power diminished | World | News | Express.co.uk 

Why China and Russia might find common security ground in Afghanistan | South China Morning Post (scmp.com)

Slowly but surely, China is moving into Afghanistan (trtworld.com)

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: Reserve Bank of Australia expects upward path on interest rates …

9 August 2021, 9:25 pm EST

AUD/USD

No reports today hinting at any changes in the Reserve Bank of Australia’s decision to reduce weekly bond purchases from AUD5 billion to AUD4 billion.  This contraction in economic stimulus comes as Sydney, Australia’s largest city, and Melbourne have entered lockdowns. The delta variant outbreak is viewed by some as so serious that calls for steel fabricated rings be placed around the city of Melbourne, for example.

The RBA notes that Australia’s move toward economic recovery has been stymied by the delta outbreak.  In its August 2021 Statement on Monetary Policy, the RBA found that, “The near-term outlook is highly uncertain and dependent on health outcomes. Further large outbreaks are possible, but the need for extended lockdowns should diminish as vaccination coverage increases.  The longer the lockdowns continue, however, the more likely it is that jobs are lost.”

The RBA expects recent lockdowns to be less onerous on the economy when compared to lockdowns in the first half of last year.  This is because businesses have adjusted their models to compensate for changes in consumption.

Consumer price index (CPI) inflation was measured at 3.8% last June due in part to reversals in declining prices as the economy started an upward climb.  When volatile items such as petrol, fruits and vegetables are removed from the estimate, inflation was around 1.75%.

The RBA reported strengthening exports with increases in prices for its commodities.  The RBA noted that the AUD continues to depreciate in spite of high prices.  The RBA describes yields and spreads on corporate bonds and interest rates as low.

The RBA expects interest rates to continue on an upward path for advanced economies given bottlenecks in supply chains and rapid re-openings.  Interestingly, the RBA did not specify that such increases would happen in the Australian economy.

On the other hand, Australia may see increases in interest rates as it tapers its bond purchases.

As of 5 August, the yield on the Australian government 2-year bond was .03%.  Bloomberg reports two-year yields on U.S. Treasuries at 0.21%. As of 9:21 pm EST, Reuters reports the AUD/USD exchange rate at 0.7330 USD.

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%