An importer wants to short the dollar …

Tywin Lannister decides to invest in the import/export business.  He wants to import certain goods from the United Kingdom and resell them in the United States.  He estimates that he will need 7.5 million British pounds (GBP) to purchase, package, process, and deliver his British goods to the U.S. 

At an exchange rate of $1.3740 per British pound, he estimates borrowing $10.305 million from his US bank.  The borrowed amount also includes his estimated profit.

To sweeten the deal with the prime brokerage division of his bank, he offers up $1.05 million dollars in cash and securities as collateral.

Lannister’s business venture so far in Great Britain is a success.  His take comes in (for the purpose of this discussion) at the estimated 7.5 million GBP which also includes his profit.  He would not mind expanding his profit so he hopes that the dollar weakens or depreciates. Fortunately for Lannister the dollar price of a pound has increased to $1.5801.  After converting his pounds to dollars, he realizes $11.85 million, and after repaying his loan, he takes home approximately $1.54 million in profit from his venture.

Lannister likely benefited from a number of market forces.  For example, incomes in the US may have been increasing faster than those in the UK thus increasing demand for the UK’s exports and currency.  The UK’s currency appreciates versus the US.

Prices in the US may have been rising rapidly when compared to prices in the UK. The resulting demand for lower priced UK products would have resulted in an appreciation of the UK’s products and currency.

In addition, interest rates in the UK may have risen higher than in the US, incentivizing the movement of money from the US to the UK resulting in an appreciated UK currency.

A trader’s sound monetary policy strategy will emphasize interest rate moves, but will not discount to zero the other market forces that impact currency values.  Lannister no doubt kept his eyes on all the factors, but given that a central bank is the “farmer” of its nation’s respective currency, Lannister, and any other importer, will pay close attention to the interest rate actions (monetary policy) of its central bank.

Alton Drew 23 September 2021

Interbank Market News Scan: The fallacy of free markets

1 September 2021

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

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

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

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

Alton Drew

For a consultation on any regulatory or legislative discussions or announcements, please reach out to us at altondrew@altondrew.com for information on consultation rates and to reserve an appointment.

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

29 August 2021

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

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

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

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

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

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

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

Alton Drew

  For a consultation on any regulatory or legislative discussions or announcements, please reach out to us at altondrew@altondrew.com for information on consultation rates and to reserve an appointment.

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.

Banks as currency agents …

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

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

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

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

For US major trade partners, a mixed bag on their costs for the dollar …

The top twelve destinations for U.S. exports are Canada, Mexico, China, Japan, Great Britain, France, Germany, Belgium, South Korea, Norway, Brazil, and Taiwan. There has been a mixed bag in terms of increases or decreases in each country’s cost of the US dollar since the beginning of 2021. Using currency data from OANDA, we identified the rate changes between 1 January 2021 and 18 March 2021.

Currency pair1 January 202118 March 2021Percentage change
USD/CAD1.27411.2450-2.3
USD/MXN19.883320.59713.6
USD/CNY6.52776.5006-0.4
USD/JPY103.1600109.07005.7
USD/GBP0.73250.7189-1.9
USD/EUR(1)0.81530.83882.9
USD/KRW1,086.10001,128.13003.9
USD/NOK8.54548.4699-0.9
USD/BRL5.19165.62088.2
USD/TWD28.077228.27240.7
Source: OANDA

(1) France, Germany, and Belgium use the euro as their currency. We refer to them collectively as the Eurozone.

Since January, countries seeing their currencies significantly strengthen against the dollar are Canada and Great Britain. On the other hand, Mexico, Japan, the Eurozone, South Korea, and Brazil have seen their currencies significantly weaken, making their cost to import U.S. product more expensive.

The primary mover of currency rates is supply and demand. The increased price of the dollar could be a result of this basic economic principal. Changes in bond yields may also have an impact on currency pricing as well as changes in policy rates imposed on banks due to their central banks’ policy initiatives.

During the same period in 2020, with the exception of Japan, all other top US trading partners saw their costs for US exports increase as shown in the following table:

Currency pair1 January 202018 March 2020Percentage change
USD/CAD1.30161.41008.3
USD/MXN18.906422.826620.7
USD/CNY6.96687.00480.4
USD/JPY108.6300106.9900-1.5
USD/GBP0.75830.82318.5
USD/EUR0.89150.90351.3
USD/KRW1,154.56001,240.10007.4
USD/NOK8.790610.357317.8
USD/BRL4.01635.006924.7
USD/TWD29.953130.21870.9
Source: OANDA

The shut downs around the globe due to the pandemic we believe may be the significant factor behind the changes in direction of these currency pairs.

18 March 2021 11:58 am EST

A very quick thought: Thought as base for currency value?

I believe that contained in all currency, whether digital or analog, is some notion of value. What is the next value play that drives up the value of a currency other than trust? Can intellectual property or thought be a currency driver? Crypto is mined when a problem is resolved. Can problem solvers be the next currency issuers?

I think in the next twenty years, the US dollar will be the default currency within the United States. As Amazon and other platforms replace the US public delivery structure, they will issue more of their own “currency” and compete with the US. They will become exclusive to their own members and keep low income people off of their platforms, especially as the affluent move out of large cities and into the suburbs, exburbs, and rural areas where they can find more space and be around fewer people.

Interbank market scan: Central Banks and Foreign Exchange … and the year of the Ox.

Follow the links …

In a sign of continued maturity as a macro asset, bitcoin now looks to be leading the price action in the foreign exchange markets (FX). Bitcoin Starting to Lead FX Markets, Analysis of Tesla Reaction Shows: Report – CoinDesk

Group of Seven finance ministers are expected on Friday to back a new allocation of the International Monetary Fund’s own currency, or Special Drawing Rights, to help low-income countries hit by the coronavirus pandemic. GRAPHIC-Which countries would benefit most from an IMF SDR increase (msn.com)

World shares dipped on Friday as investors awaited progress towards more U.S. fiscal stimulus, while the dollar was set for a weekly loss and cryptocurrency Bitcoin hit a record high. World shares dip and Bitcoin hits record high – Metro US

Currency pairsExchange Rate as of 4:15 pm 8 February 2021(1) As of 12:31 pm EST Exchange Rate as of 12 February 2021(2)
AUD/USD0.7656 0.7725
USD/CAD1.2781 1.2694
USD/CNY6.4664 6.4542
EUR/USD1.2035 1.2124
USD/INR72.8500 72.6000
GBP/USD1.3714 1.3855
USD/JPY105.4400 104.9500
USD/MXN20.1300 19.9320
USD/DKK6.1785 6.1496
USD/NOK8.5428 8.4958
Sources: Federal Reserve (1) ; Reuters (2)

Government strategy: Is Biden staffing up for currency war with China and the Eurozone?

Last Friday, the Federal Reserve Bank of New York announced that the head of its markets group, Daleep Singh, has resigned to join the Biden administration as both Deputy National Security Advisor and Deputy National Economic Advisor. This is the second prominent Biden administration choice being asked to sit in what apparently are two different policy realms: foreign and domestic. Dr. Susan Rice, who is an expert in foreign affairs, is currently Mr Biden’s assistant for domestic policy and chair of the domestic policy council in Mr Biden’s absence.

Mr Biden reportedly thinks of domestic and foreign policy as one and the same. One of the holdovers from the Trump administration is the focus on China. Mr Biden has expressed that China should expect “extreme competition” from the United States while emphasizing that there is room for accord without conflict. Mr Biden has signaled that avoiding conflict during intense competition may require falling back on existing international law.

Mr Biden’s China agenda will require buy-in from the American public. American manufacturers and farmers in particular were directly impacted by the Trump administration’s tariff war with China. Mr Biden will need a domestic policy agenda that gets Americans on board with his China initiative while crafting a policy agenda towards China that reflects benefits in the American domestic economy.

The currency portion of the foreign agenda toward China for now does not include a currency war. At the outset of her tenure Treasury Secretary Janet Yellen signaled that the US would abandon any remnant of the “strong dollar” policy favored by the Trump administration preferring instead to allow the market to determine currency rates. The dollar’s overall steady weakening in currency markets makes its domestically produced goods more attractive to foreign importers, a weakening not due to any market intervention on the part of the United States. In theory this makes domestically produced items more attractive price wise to US taxpayers and makes imports from foreign nations i.e. China, more expensive.

Secretary Yellen will be receiving direct messaging from the Executive Office of the President on China and likely on currency issues. Ms Yellen, as Treasury secretary, is a member of the National Security Council for which Mr Singh will now have a high staff role. Mr Singh has extensive experience in the area of foreign exchange having focused on U.S. interest rates and the currency markets for the better part of eight years when he was with Goldman Sachs. Secretary Yellen is also a member of the Domestic Policy Council where Dr. Rice will serve as chairman when Mr Biden is not present.

The government strategy takeaway here is to pay additional attention to the messaging from the national security council and the domestic policy council and ascertaining whether messages out of the Executive Office of the President and the Treasury Department are in sync when it comes to the US’ stance on currency markets.

Government strategy: Jobs report firms Biden resolve to focus on household aid …

Currency pairsExchange Rate as of 4 February 2021The eventPost Event-Exchange Rate as of 5 February 2021 
AUD/USD0.7616US adds 49,000 jobs. Biden believes years before US sees full employment0.7616 
USD/CAD1.2782US adds 49,000 jobs. Biden believes years before US sees full employment1.2809 
USD/CNY6.4585US adds 49,000 jobs. Biden believes years before US sees full employment6.4639 
EUR/USD1.2030US adds 49,000 jobs. Biden believes years before US sees full employment1.9920 
USD/INR72.8942US adds 49,000 jobs. Biden believes years before US sees full employment72.8955 
GBP/USD1.3651US adds 49,000 jobs. Biden believes years before US sees full employment1.3637 
USD/JPY105.0200US adds 49,000 jobs. Biden believes years before US sees full employment105.3000 
USD/MXN20.1501US adds 49,000 jobs. Biden believes years before US sees full employment20.3041 
USD/DKK6.1815US adds 49,000 jobs. Biden believes years before US sees full employment6.2005 
USD/NOK8.5960US adds 49,000 jobs. Biden believes years before US sees full employment8.6190 
Source: OANDA

In the news

From the White House’s Council of Economic Advisors. This morning’s jobs report reveals that the pace of job gains has slowed sharply in recent months as the pandemic continues to weigh on job creation, especially in face-to-face services. Strong relief is urgently and quickly needed to control the virus, get vaccine shots in arms, and finally launch a robust, equitable and racially inclusive recovery. The Employment Situation in January | The White House

House Democrats on Friday voted to adopt a final budget measure, setting off an approximately two-week sprint to draft a coronavirus relief bill that would mark President Joe Biden’s first legislative win. House clears way for massive coronavirus stimulus plan (msn.com)

The Commerce Department’s National Telecommunications and Information Administration (NTIA) is committed to increasing broadband Internet access across America, particularly in unserved and underserved communities. The recently enacted Consolidated Appropriations Act of 2021 provides new sources of tribal broadband funding to assist in mitigating the effects of the COVID-19 pandemic which is exacerbating the digital divide across Indian Country.  NTIA Announces Tribal Consultations on New Program to Increase Broadband Access Across Indian Country | U.S. Department of Commerce

The Takeaway

The White House will not be placing emphasis on infrastructure deployment via its “American Rescue Plan.” The White House appears focused on short term aid to households via an additional $1400 in aid payments and on the gender issue, particularly the reported disproportionate impact pandemic-induced unemployment has had on women in the workforce. Not to say that infrastructure is off the agenda. Mr Biden through the U.S. Department of Commerce, has announced the administration’s intent to incentivize the deployment of broadband infrastructure on Native American lands via grants from the U.S. Department of Commerce.

Mr Biden’s approach to infrastructure, at this juncture, seems more like patchwork versus coordinated, targeted, and streamlined. Covid relief itself, through the American Rescue Plan, looks like it will be delayed with final work on legislation not expected until March 14th.

Currency markets should not view the funding as a currency mover especially with no definitive information on the impact the funding will have on interest rates or yields, factors that make the US more attractive for investment thus greater demand for US currency.