Part of reading the United States’ currency value is reading the underlying shift in its cultural values.

Commentary

The United States is at a crossroads in terms of its culture. A corporate democracy such as this one sees elected officials willing to deficit spend on programs designed to buy votes from an electorate increasingly under stress due to the uncertainty of an economy that may not be able to provide for their wants and needs. According to the Congressional Budget Office (CBO), America’s fiscal year 2021 budget deficit is approximately $3.003 trillion. While estimated revenues totaled $3.842 trillion, FY2021 outlays were estimated at $6.845 trillion. Fiscal year 2020 saw estimated revenues at $3.420 trillion with outlays estimated at $6.552 trillion. The FY2020 deficit was higher than FY2021, coming in at $3.142 trillion.

I would expect the Administration to argue that the last two years saw the federal government increasing its outlays to combat the Covid-19 pandemic, but if we go back 40 years, we find not only expected increases in outlays and revenues, but increases in outlays far outstrip increases in revenues. For example, FY1982 outlays were $.746 trillion compared to FY2021 outlays of $6.845 trillion, amounting to a 818% increase over the 40 year period. The increase in revenues over the same period amounted to 522%, where FY1982 revenues totaled $.618 trillion and FY2021 revenues came in at $3.842 trillion.

In addition, mandatory spending, which is dictated by past law that sets out mandatory requirements for spending on items such as social security, Medicare, and income security programs, increased 1,211% between FY1982 and FY2021. Meanwhile, discretionary spending, where a program is approved during the congressional appropriations process, saw a 407% increase in outlays between FY1982 and FY2021. The programs funded during this process include national defense, transportation, education, and housing.

Democracy is expensive. As politicians carve out “alphabet fiefdoms” ie, BLM, LGBQT+, Latinx, DEI (diversity, equity, inclusion programs) etc., the promises made convert into programs that have to be paid for. Low interest rates over the last decade and a half have accompanied the expansion in spending. Cheap money leads to more spending. For example, according to data from the Federal Reserve, the current prime lending rate is approximately 3.25%. This represents a 70.4% decline in the prime rate since 8 August 1983.

In addition, the rates on Treasury debt issued to fund government programs have been falling steadily since January 2000. According to data from the US Treasury, interest rates reflecting long term composite debt in excess of ten years has fallen from 6.87% in January 2000 to 1.89% in December 2021.

Democracy is expensive, but the current low interest rate environment gives American politicians the impression that democracy is affordable. With every new demand from small but vocal factions along the political spectrum, the wider the interest-rate driven deficit.

I have started to liken a currency to a coupon you get from a fast food restaurant. No matter how deep the discount, the crappier the food, the less valuable the coupon. The US Treasury-Federal Reserve Fast Food Corporation is no different. The current rate of inflation (6.8%) that destroys its spending value compounds the damage from lower rates of return and from increased government spending designed to buy votes while providing little other value to the currency holder.

Alton Drew

9.01.2022

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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: Bank of England to announce interest rate targets today

Interbank, central bank, Bank of England. At 12 pm GMT (8:00 am EST), the Bank of England (BOE) releases its monetary policy report today including its target interest rates.  The current bank rate is set at 0.1%.  The bank rate determines the interest rates the BOE pays to commercial banks which in turn impacts rates paid by commercial bank borrowing customers.  This rate is important to traders because it provides valuable information that can be used to determine changes in inflation and yields on government bonds which in turn provides the trader with insights as to where foreign exchange rates will move.  

The BOE’s current inflation target is 2.0%, but actual inflation is running at 3.1%.  Since November 2009, the BOE has purchased £895 million in corporate and government bonds as part of its quantitative easing program.  QE is intended to help lower interest rates and stimulate growth in the British economy.

Traders should contact their brokers for more information on how BOE’s interest rates decision may move foreign exchange rates.

Interbank, central bank, Federal Reserve.  Yesterday, the Board of Governors of the Federal Reserve System announced that its federal fund and discount window rate target would remain between 0-.25%. In addition, the Federal Reserve will begin to reduce later this month its monthly purchases of US Treasury bonds and agency mortgage-backed securities.  It will reduce its monthly purchase of US Treasurys from $80 billion to $70 billion.  It will reduce its monthly agency mortgage-backed securities from $40 billion to $35 billion.

The Federal Reserve asset purchases were designed primarily to keep interest rates and stimulate the economy during the COVID pandemic.  As more Americans are vaccinated and the negative impact of the supply chain congestion wanes, the Federal Reserve is seeing more reasons to trim its asset purchases.

The Federal Reserve has made it clear that the decision to taper asset purchases and the decision to raise the federal funds rate are separate issues.  If, however, the taper policy was implemented to stimulate the economy by keeping interest rates low, traders should expect upward movement in interest rates as a result.  Increased interest rates may have an impact on the direction of foreign exchange rates regardless of a Federal Reserve decision to increase the fed funds rate.

Traders should contact their brokers for more information on how the Federal Reserve’s fed funds rate and tapering decisions may move foreign exchange rates.

Alton Drew

4.11.2021

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.

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: 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.

Interbank market news scan: Foreign exchange rates as the markets enter Easter weekend and the American capitol sees another attack …

Politics. A motorist rammed a vehicle into U.S. Capitol police on Friday and brandished a knife, killing one officer and injuring another and forcing the Capitol complex to lock down in an attack that police said did not immediately appear to be terrorism-related. Police officer killed in vehicle attack on U.S. Capitol | Reuters

Currency PairsRates as of 4:11pm 2 April 2021
EUR/USD1.1762
AUD/USD0.7602
GBP/USD1.3821
USD/JPY110.6800
NZD/USD0.7018
USD/CHF0.9421
USD/NOK8.5278
USD/SEK8.7239
USD/CAD1.2568
  
Selected Rates 
Fed Funds.07
Bank prime rate3.25
Discount window.25
2-yr Treasury.19
10-yr Treasury1.72
30-yr2.36
Sources: Bloomberg, Reuters

Interbank market news scan: The equity markets in the US may be closed, but foreign exchange markets are not resting in light of an improving employment picture …

The U,S, Department of Labor today reported that non-farm payrolls increased in March by 916,000 employees while the unemployment rate fell to 6.0%. Employment gains were led buy the leisure and hospitality, public and private education, and construction sectors. THE EMPLOYMENT SITUATION — MARCH 2021 (dol.gov)

Currency PairsRates as of 9:19am 2 April 2021
EUR/USD1.1768
AUD/USD0.7614
GBP/USD1.3837
USD/JPY110.5800
NZD/USD0.7032
USD/CHF0.9409
USD/NOK8.5335
USD/SEK8.7131
USD/CAD1.2548
  
Selected Rates 
Fed Funds.07
Bank prime rate3.25
Discount window.25
2-yr Treasury.18
10-yr Treasury1.71
30-yr2.36
Sources: Reuters, Bloomberg

The Miami-Fort Lauderdale-West Palm Beach commercial real estate market feels heat …

The National Association of Realtors in its Commercial Real Estate Metro Market Report for Q4 2020 determined that the Miami-Fort Lauderdale West Palm Beach, Florida commercial real estate market is weak. The apartment sector is experiencing faster rent growth than nationally. There is a loss in office occupancy and office rent growth is weaker than nationally. There is a loss in office occupancy and office rent growth is weaker than nationally. In the industrial sector, the industrial vacancy rate is higher than nationally and more construction is underway than nationally. Its retail trade jobs are not growing as fast than nationally. In the hotel/lodging sector, leisure and hospitality jobs are shrinking. There is a lower share of of businesses openings than nationally. In 2019, the area experienced net out-migration.

Commercial transactions are likely to pick up in the second half of 2021 and in 2022 as more people get vaccinated and more businesses open. Higher fiscal spending and monetary accommodation will boost growth nationally and in the area.

Selected statistics

Currency PairsRates as of 4:11pm 1 April 2021
EUR/USD1.1770
AUD/USD0.7614
GBP/USD1.3829
USD/JPY110.5900
NZD/USD0.7021
USD/CHF0.9418
USD/NOK8.5275
USD/SEK8.7131
USD/CAD1.2551
  
Selected Rates 
Fed Funds.07
Bank prime rate3.25
Discount window.25
2-yr Treasury.16
10-yr Treasury1.67
30-yr2.33
Economic IndicatorQ4 2020Q3 2020Q4 2019
Apartment rent$1,515$1,489$1,521
Office asking rent per square foot$38.7$37.7$37.0
Multifamily rental vacancy rate5.8%4.7%7.3%
Industrial asking rent per square foot$9.3$9.3$8.7
Source: Bloomberg, Reuters, Federal Reserve

Interbank market news scan: Foreign exchange and selected interest rates at 9:03 am EST 1 April 2021

Currency PairsRates as of 9:01am 1 April 2021
EUR/USD1.1745
AUD/USD0.7567
GBP/USD1.3786
USD/JPY110.7500
NZD/USD0.6988
USD/CHF0.9456
USD/NOK8.5446
USD/SEK8.7355
USD/CAD1.2590
  
Selected Rates 
Fed Funds.07
Bank prime rate3.25
Discount window.25
2-yr Treasury.16
10-yr Treasury1.70
30-yr2.36
Sources: Bloomberg, Federal Reserve, Reuters

Interbank market news scan: Foreign exchange and selected interest rates as of 9:18 am EST

Currency PairsRates as of 9:18am 31 March 2021
EUR/USD1.1725
AUD/USD0.7610
GBP/USD1.3769
USD/JPY110.7400
NZD/USD0.6995
USD/CHF0.9429
USD/NOK8.5181
USD/SEK8.7293
USD/CAD1.2607
  
Selected Rates 
Fed Funds.07
Bank prime rate3.25
Discount window.25
2-yr Treasury.14
10-yr Treasury1.73
30-yr2.43
Source: Reuters, Federal Reserve

Interbank market news scan: Foreign exchange rates, Fed Funds rate, and Treasurys as of 9:00 am EST

Currency PairsRates as of 9:00am 30 March 2021
EUR/USD1.1734
AUD/USD0.7615
GBP/USD1.3738
USD/JPY110.3600
NZD/USD0.6986
USD/CHF0.9919
USD/NOK8.5728
USD/SEK8.6901
USD/CAD1.2617
  
Selected Rates 
Fed Funds.07
Bank prime rate3.25
Discount window.25
2-yr Treasury.14
10-yr Treasury1.67
30-yr2.37
Source: Reuters, Federal Reserve