Interbank market news scan: Federal Reserve lists principles for reducing its balance sheet; foreign exchange rates of interest …

Interbank, Federal Reserve. The Board of Governors of the Federal Reserve reiterated that its primary policy tool for managing the money supply, maintaining stable prices, and pursuing maximum employment is the federal funds rate, the interbank, overnight rate banks apply when lending reserves to each other. The Board will reduce its balance sheet of assets after its initial raising of the federal funds rate which markets expect to occur in March 2022. Legal advisors should keep this in mind when reviewing or counseling clients on foreign exchange contracts. To see the Board’s release, follow this link.

Interbank, US Dollar. Analysts are expecting further slippage in the euro versus the dollar given the Board of Governors of the Federal Reserve’s decision last Wednesday on interbank overnight lending rates (the federal funds rate). Analysts are seeing the EUR/USD falling to support levels as low as 1.10. Legal advisors should keep this in mind when advising clients on foreign exchange contracts. To see this article, follow this link.

Interbank, SONIA. As banks transition from LIBOR to alternative interest rate benchmarks, here is a discussion on implications from and an update on the status on making the change from LIBOR.

Interbank, European Central Bank. The ECB issues a statement on historically low number of counterfeit banknotes. Approximately 347,000 banknotes were withdrawn from circulation. To see this article, follow this link.

Foreign exchange rates of interest to Atlanta’s immigrant community

EUR/USD=1.1180

GBP/USD=1.3406

USD/MXN=20.7530

USD/GTQ=7.5208

USD/NGN=414.8790

USD/GHS=6.1895

USD/VND=22,633.9000

USD/JPY=115.0500

USD/INR=75.1226

USD/BTC=0.00003

USD/ETH=0.00041

Source: OANDA

Interbank market news scan: BIS releases paper on virtual banking; forex rates of interest to Atlanta; Ethereum strengthens slightly

Bank of International Settlements. Today, the Bank of International Settlements released a paper on virtual banking providing insights on the use of information capital as a substitute for tangible capital. The paper argues that information capital, comprised of an enterprise’s or individual’s digital data footprint, can be used as collateral for obtaining credit, thus increasing access to credit by small and medium businesses and low income individuals.

While the paper uses the Hong Kong market as a case study, I believe that if US-based banks and fintechs embarked on the same initiative, the following legal issues may arise. Can information capital be used as collateral when borrowing for the purpose of purchasing foreign currencies? Does the use of information capital raise discrimination issues where biases are embeded in the artificial intelligence programming? Are existing laws sufficient for protecting enterprise or individual data privacy where such data is encompassed in information capital used as collateral?

The link to the BIS paper can be found here.

Federal Reserve Bank of New York. Yesterday after the Board of Governors of the Federal Reserve announced that it would hold its interbank rate for overnight lending between 0 and .25%, the Federal Reserve Bank of New York announced that the reserve bank’s Open Market Trading Desk would increase its System Open Market Account holding of Treasury securities by at least $20 billion per month and its agency mortgage-backed securities by at least $10 billion per month. This reduced level of purchasing (down from a combined high of $120 billion per month at the beginning of the pandemic) will commence on 14 February 2022.

The link to the New York Fed’s announcement can be found here.

Interbank Market, Pakistan. The rupee held steady against the dollar at Rs176.98 but has been depreciating in value since 1 July 2021. See link to article here.

Foreign exchange rates as of 10:00 am EDT

EUR/USD=1.1282

GBP/USD=1.3500

USD/MXN=20.6258

USD/GTQ=7.5060

USD/NGN=414.7010

USD/GHS=6.1790

USD/VND=22,632.2000

USD/JPY=114.1900

USD/INR=74.8041

USD/BTC=0.00003

USD/ETH=0.00039

Source: OANDA

Retail traders should keep their eyes on the euro-dollar-yuan battle …

Foreign exchange rates of interest …

EUR-USD= 1.1346

EUR-CNY=7.2276

GBP-USD=1.3602

GBP-CNY=8.6651

USD-JPY=115.355

JPY-CNY=0.0552

Source: OANDA

The Morning Takeaway …

The political banter by the United States regarding China is in part driven by the perceived economic necessity to penetrate deeper into the Chinese market thus the rest of Asia. Turning a population in excess of one billion into a consumption machine is American capitalism’s dream. The other part of America’s obsession has to do with what I see as a socio-political incongruity; how dare the Chinese with their communist government and state-capitalist model dare to outdo the United States’ “big tent, we are all in this together, free market, free enterprise” model?

I think stuck in the middle of the battle is the Euro Zone, capital rich, relatively speaking, but energy resource poor. Europe takes a more practical approach to conflicts emanating out of Eurasia unlike the United States which prefers stand outside and throw rocks at the window of a perceived damsel in distress. When the rock throwing fails it then leverages its military prowess and knocks down a few doors. Given its past twenty year record in the Middle East and Central Asia, it should consider changing strategy.

The data …

JPY-CNY

On 13 December 2021, the JPY-CNY=0.0560. The exchange rate on 12 January 2022 at time of writing was 0.0552. The yuan over this 30-day period strengthened slightly against the yen. Compare this to USD-JPY where on 13 December 2021, the rate was at 113.551 versus the 115.335 rate as of 12 January 2022. The yen is weakening against the dollar.

GBP-CNY

On 13 December 2021, GBP-CNY was at 8.4252. By 12 January 2022, the exchange rate increased to 8.6651, indicating weakening of the yuan against the pound. Compare this to the GBP-USD exchange rate on 13 December 2021 which equaled 1.3238. On 12 January 2022, the rate increased to 1.3602, again reflecting a weakening of the dollar against the pound.

EUR-CNY

Lastly, the EUR-CNY=7.1829 on 13 December 2021. By 12 January 2022, the rate increased to 7.2276. The yuan appears to weaken over the 30-day period. Compare this to the EUR-USD on 13 December 2021 of 1.1288. The exchange rate increased to 1.1346, indicating a weakening in the dollar against the euro.

Retail traders should continue paying attention to the political environment that the above economies are being managed in.

Alton Drew

12.01.2022

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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: 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: 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.