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: 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

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%

Interbank market news scan: Foreign exchange markets preparing for U.S. jobs situation report…

March’s Nonfarm Payrolls report, which is due out on Friday at 12:30 GMT, is set to show an increase of 630,000 jobs. Here you can find the forecasts of economists and researchers of eight major banks regarding the upcoming employment data. Nonfarm Payrolls Preview: Forecast from eight major banks for March jobs report (fxstreet.com)

The U.S. dollar will remain strong for at least another month, according to a Reuters poll of foreign exchange strategists, who still forecast that the currency will weaken in the longer term. U.S. Dollar to Remain Strong for at Least Another Month: Reuters Poll | Investing News | US News

Currency PairsRates as of 2:15pm 1 April 2021
EUR/USD1.1775
AUD/USD0.7607
GBP/USD1.3824
USD/JPY110.5800
NZD/USD0.7021
USD/CHF0.9413
USD/NOK8.5295
USD/SEK8.7090
USD/CAD1.2565
  
Selected Rates 
Fed Funds.07
Bank prime rate3.25
Discount window.25
2-yr Treasury.16
10-yr Treasury1.68
30-yr2.34
Source: Bloomberg, Federal Reserve, Reuters

Interbank market news scan: USD/JPY continues to increase since beginning of Biden administration; Euro continues its uptick as well …

Currency pair20 January 202124 March 2021Percentage change
USD/JPY103.9300108.70004.6
USD/GBP0.73450.7293-.71
USD/CAD1.27311.2568-1.3
USD/EUR 0.82540.84522.4
Source: Reuters

As of 9:18 EST, 24 March 2021

Interbank market news scan as of 3:32 pm AST: Peso, Indian rupee, and Japanese yen weaken against the dollar

Currency pairsExchange Rate Before Event 1:00pm ASTEventPost EventExchange Rate Post Event
AUD/USD0.7666Federal Reserve announcement0.7681Dollar weakens vs AUD
USD/CAD1.2774Federal Reserve announcement1.2759Canadian dollar strengthens vs US dollar
USD/CNY6.4822Federal Reserve announcement6.4822No change
EUR/USD1.2075Federal Reserve announcement1.2118Dollar weakens vs the euro
USD/INR73.0065Federal Reserve announcement73.0500Indian rupee continues weakness vs US dollar
GBP/USD1.3689Federal Reserve announcement1.3715US dollar weakens vs British pound
USD/JPY104.0000Federal Reserve announcement104.0600Japanese yen showing weakness vs US dollar
USD/MXN20.1832Federal Reserve announcement20.7000Mexican peso weakens against US dollar
USD/DKK6.1554Federal Reserve announcement6.1554No change
USD/NOK8.6452Federal Reserve announcement8.6242Norwegian Krona strengthens vs US dollar
Sources: Federal Reserve, Reuters

Today, Jerome Powell, chairman of the Board of Governors of the Federal Reserve issued the following statement:

“The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.

Strategic takeaways:

  1. Traders should take a strategic position in the flow of Federal Reserve decision making on rates with the expectation of continued dollar weakness for some time as the Federal Reserve maintains its flexible average inflation rate policy for the net one to two years.
  2. The Federal Reserve may be growing weary of noting the need for fiscal action on the part of the U.S. Congress or sees no need for making such calls given the gravity of the virus and a Democratic-controlled White House and Congress that appear intent on providing another fiscal injection into the economy.
  3. Traders should expect Congress to authorize additional borrowing to finance additional stimulus. Additional fiscal demand may come at a higher interest rate price for taxpayers. Depending on how government structures the stimulus spending, monies directed to infrastructure and the ensuing contracts entered into to bring about infrastructure spending may attract additional domestic and foreign capital.
  4. The Mexican peso, Indian rupee, and Japanese yen weakened after the announcement. The dollar continued its weakness in its more popular currency pairs: the EUR/USD and the GBP/USD. The Chinese yuan remained unchanged expectedly given the People’s Bank of China’s recent announcement on their currency’s value.

Government strategy: Strong dollar versus weak dollar policy …

Earlier today, Christine Lagarde, president of the European Central Bank, gave a shout out to Janet Yellen, the U.S. Treasury-elect. President Lagarde wished Ms Yellen well on her confirmation which is expected to go favorably sometime this week. Both women have commented on the state of the foreign exchange markets this week with Dr Yellen expressing her preference for market determined foreign exchange rates and President Lagarde telling reporters during today’s European Central Bank policy rate announcement that the ECB would be monitoring foreign exchange rates “very closely.”

In its early days, the Trump administration expressed a preference for a “strong” dollar. A strong dollar scenario is one where the U.S. dollar has risen to a historically high exchange rate relative to another currency. Strength could be attributable to another nation devaluing its currency relative to the dollar in an effort to make the foreign country’s exports more competitive.

Deleveraging is another method of dollar strengthening where debts are paid off which reduces the amount of dollars in the system thus increasing the value of the dollar.

Although a strong dollar protects foreign investor holdings of U.S. assets , the higher prices for imports faced by Americans could create a political scene where consumers start asking their government to reverse the course. The prior administration’s use of tariffs in its trade spat with China raised such concerns.

While Ms Yellen has again expressed her preference for market-determined rates, her future Treasury Department could buy and sell foreign currency for the purpose of narrowing exchange rate movements should a market-determination scheme not meet the Biden administration’s policy objectives. If the dollar is viewed as depreciating too quickly, Treasury could boost demand and value by using foreign currency to buy the greenback. If the dollar is viewed as appreciating too quickly, the Treasury could resort to using the dollar to buy foreign currency. If Dr. Yellen stays the course on a market policy, then the tactic will be to allow the foreign exchange rate to move to equilibrium.

Across the Atlantic, President Lagarde will likely not just look at exchange rates but try to determine the impact rates is having on yields. The European Union has been signaling its desire to boost the status of its currency, hoping to attract more investment to the Eurozone. President Lagarde would likely want to see appreciation in the euro and an accompanying increase in yields.

Traders and brokers should pay close attention to policy moves designed to make the euro and the dollar more attractive to investors and also how the European Union positions itself between the United States and China. Depending on how competitive the United States and the European Union become, shout outs between Dr yellen and President Lagarde will become more interesting.

Government strategy: Strong dollar versus weak dollar policy …

Earlier today, Christine Lagarde, president of the European Central Bank, gave a shout out to Janet Yellen, the U.S. Treasury-elect. President Lagarde wished Ms Yellen well on her confirmation which is expected to go favorably sometime this week. Both women have commented on the state of the foreign exchange markets this week with Dr Yellen expressing her preference for market determined foreign exchange rates and President Lagarde telling reporters during today’s European Central Bank policy rate announcement that the ECB would be monitoring foreign exchange rates “very closely.”

In its early days, the Trump administration expressed a preference for a “strong” dollar. A strong dollar scenario is one where the U.S. dollar has risen to a historically high exchange rate relative to another currency. Strength could be attributable to another nation devaluing its currency relative to the dollar in an effort to make the foreign country’s exports more competitive.

Deleveraging is another method of dollar strengthening where debts are paid off which reduces the amount of dollars in the system thus increasing the value of the dollar.

Although a strong dollar protects foreign investor holdings of U.S. assets , the higher prices for imports faced by Americans could create a political scene where consumers start asking their government to reverse the course. The prior administration’s use of tariffs in its trade spat with China raised such concerns.

While Ms Yellen has again expressed her preference for market-determined rates, her future Treasury Department could buy and sell foreign currency for the purpose of narrowing exchange rate movements should a market-determination scheme not meet the Biden administration’s policy objectives. If the dollar is viewed as depreciating too quickly, Treasury could boost demand and value by using foreign currency to buy the greenback. If the dollar is viewed as appreciating too quickly, the Treasury could resort to using the dollar to buy foreign currency. If Dr. Yellen stays the course on a market policy, then the tactic will be to allow the foreign exchange rate to move to equilibrium.

Across the Atlantic, President Lagarde will likely not just look at exchange rates but try to determine the impact rates is having on yields. The European Union has been signaling its desire to boost the status of its currency, hoping to attract more investment to the Eurozone. President Lagarde would likely want to see appreciation in the euro and an accompanying increase in yields.

Traders and brokers should pay close attention to policy moves designed to make the euro and the dollar more attractive to investors and also how the European Union positions itself between the United States and China. Depending on how competitive the United States and the European Union become, shout outs between Dr yellen and President Lagarde will become more interesting.

As of 10:59 am AST, dollar shows some strengthening as yields increase

PairsFederal Reserve as of 8 January 2021OANDA as of 11 January 2021OANDA as of 12 January 2021 10:59 am AST
GBP/USD1.35831.35031.35026
USD/CAD1.26981.27691.2769
USD/CNH6.47506.47826.4782
USD/DKK6.06976.11156.1115
EUR/USD1.22521.21671.2167
USD/INR73.310073.409373.4093
USD/MXN19.941020.120320.1203
USD/JPY103.8900104.1600104.1600
USD/NOK8.40748.51598.5159
USD/SEK8.20858.28078.2807
USD/CHF0.88430.88920.8892
Sources: Federal Reserve, OANDA
RatesFederal Reserve as of 8 January 2021Bloomberg as of 12 January 2021 10:59 am AST
Federal Funds Rate0.090.08
Prime Rate3.253.25
3-month Treasury0.080.08
2-year Treasury0.140.15
10-year Treasury1.131.17
30-year Treasury1.871.89
Sources: Federal Reserve, Bloomberg

As of 10:00 pm AST, the dollar strengthens against the rupee, peso, yen, Swedish krona, and Swiss franc …

PairsFederal Reserve as of 4 January 2021OANDA as of 4 January 2021OANDA as of 10 January 2021 10:00 pm AST
GBP/USD1.36621.36331.3559
USD/CAD1.27531.27261.2687
USD/CNH6.52506.45526.4631
USD/DKK6.08396.06576.0823
EUR/USD1.22301.22641.2215
USD/INR73.010072.936773.2500
USD/MXN19.892019.838219.9603
USD/JPY103.1900103.0200103.9400
USD/NOK8.57578.53008.4110
USD/SEK8.20958.20918.2316
USD/CHF0.88410.88150.8851
Source: Federal Reserve, OANDA

Legal/Political/Economic/ Events Impacting US Dollar

Pressure mounts on US president to leave office before 20 January

At the time of this writing, no public statement surrounding the issue of leaving office has been issued by President Trump. Bloomberg reports mounting pressure on Vice President Mike Pence to gather the President’s cabinet and bring about Mr Trump’s removal from office by invoking the 25th Amendment of the U.S. Constitution. Speaker of the House Nancy Pelosi is expected to move on a House resolution that gives Vice President Pence 24-hours to invoke the 25th Amendment. If Mr Pence does not meet the 24-hour deadline, the House will then move to impeach the President.

Section 4 of the 25th Amendment allows the Vice-President and “a majority of either the principal officers of the executive departments or of such body as Congress may by law provide” to transmit a written declaration to the President pro tempore of the Senate and the Speaker of the House that the President is no longer fit to serve.